Rupee may depreciate 8-10 pc during Trump 2.0, says SBI report

Context: The rupee may depreciate 8-10 per cent against the US
dollar during the Trump 2.0 regime, said a SBI research report, even as the
local currency hit its all-time low on Monday. Declining for the fourth
straight session, the rupee dropped 2 paise to hit a new lifetime low of 84.39
(provisional) against the US dollar on Monday, weighed down by persistent
foreign fund out-flows and a muted trend in domestic equities. The report
emphasised that “the fear” that the rupee will depreciate sharply is unfounded.
During the Trump 1.0, it said, the rupee depreciated by 11 per cent, less than
it depreciated during the Joe Biden term.

Key points

·      
Overview: According to the report, India may see shifts in
foreign direct investments (FDIs) during Trump 2.0. The Trump 1.0
administration saw significant regulatory changes aimed at attracting
investments back to the US, and this was reflected in data also.

·      
Impact of
Depreciation on the Indian Economy: Positive- Weaker rupee should theoretically give a boost to
India’s exports, but in an environment of uncertainty and weak global demand, a
fall in the external value of rupee may not translate into higher exports.

Negative- It
poses risk of imported inflation and may make it difficult for the central bank
to maintain interest rates at a record low for longer. India meets more than
two-thirds of its domestic oil requirements through imports. India is also one
of the top importers of edible oils. A weaker currency will further escalate
imported edible oil prices and lead to a higher food inflation.

·      
Strength or
Weakness of the Rupee: India
trades not only with the US. It exports goods and services to other countries
as well, while also importing from them. Hence, the strength or weakness of the
rupee is a function of its exchange rate with not just the US dollar, but also
with other global currencies. It is calculated by what is called the rupee’s
effective exchange rate (EER).

·      
Effective
exchange rate (EER): The EER is
measured by an index like the consumer price index (CPI). The EER is an index
of the weighted average of the rupee’s exchange rates vis-à-vis the currencies
of India’s major trading partners. The currency weights are derived from the
share of the individual countries to India’s total foreign trade, just as the
weights for each commodity in the CPI are based on their relative importance in
the overall consumption basket.

Nominal EER (NEER) - The Reserve Bank of India (RBI) has constructed NEER indices of the
rupee against a basket of six and of 40 currencies. The rupee’s 40-currency
basket NEER has fallen by around 32.2% (from 133.8 to 90.8) between 2004-05 and
2023-24.

Real EER (REER) - The REER is basically the NEER that is adjusted for the inflation
differentials between the home country and its trading partners. The rupee has
strengthened in real terms over time, while ruling at 100 or above in 9 out of
the last 10 years.

·      
Conclusion: FDI is now coming in many new sectors like
non-conventional energy, sea transport, medical and surgical appliances, etc. This
trend could continue, thus offsetting the possibility of a decline in FDI flows
in traditional sectors in Trump 2.0. If the Trump administration opts to limit
work visas, particularly the H-1B visa programme, Indian IT and ITeS sectors
may see increased costs. H-1B visa restrictions can lead to decreased labour
mobility, affecting the hiring capabilities of Indian IT companies operating in
the US.