DC Edit | Rupee Caught In Geopolitical Trap

Ever since US President Donald Trump stepped up his efforts to acquire Greenland in the second week of January, the rupee, like the currencies of other emerging economies, bore the brunt of geopolitical uncertainties, especially a much-dreaded Transatlantic trade war between America and Europe.

On January 21, the rupee crashed to an all-time low of 91.74 against the US dollar, following aggressive selling from foreign institutional investors (FIIs) and high demand for dollars from importers. The Reserve Bank of India is said to have intervened to prevent further erosion in the rupee value. However, Trump’s announcement that the US will not use force to take over Greenland and dialling back on his threat to impose tariffs to punish European countries has brought a relief rally in the Indian currency on January 22. It has also brought in a much-needed correction in gold and silver prices.

Nevertheless, the rupee is still not yet in a safe zone. The Indian currency has been sliding steadily for months, even as the US dollar index has weakened by 4-5 per cent over the past year. The rupee is also facing pressure due to penal US tariffs, the global craze for AI-focused companies, higher Indian stock valuations, and global protectionism. None of these issues is going to be resolved anytime soon, which could keep India’s rupee under stress.

While exporters theoretically benefit, the advantage is limited. It will immediately increase the cost of fuel. Around 40 per cent of India’s exports contain imported inputs, which means currency depreciation raises costs and erodes margins. On the domestic front, a five per cent fall in the rupee is estimated to add 20-30 basis points to inflation through higher fuel, transport and manufactured goods costs. The rupee, therefore, has no easy way out. Indians need to prepare for an extended period of stress until the global economic disorder becomes a new normal.