India Ready To Weaken Rupee In Line With Yuan After Trump Win

India’s central bank is ready to let the rupee weaken in tandem with the Chinese yuan after Donald Trump’s election win spurred fears of higher US tariffs, according to people familiar with the thinking of policymakers.

A depreciating yuan will lower the cost of Chinese goods, potentially leading to more imports and further widening India’s biggest trade deficit with any country. The Reserve Bank of India is poised to cushion the blow by allowing a weaker rupee, even while using its ample reserves to keep the fall in check, according to the people, who asked not to be identified due to the sensitivity of the matter.

Analysts have already started revising their rupee forecasts. The currency will breach 85 to a dollar within 12 months, according to HDFC Bank Ltd., while IDFC First Bank Ltd. sees it hitting 84.50 much before its earlier projection of March. 

The rupee closed at 84.3750 Friday, posting its biggest weekly loss since May. Yet, it’s one of the least volatile currencies in the world, with the RBI using its substantial foreign-exchange reserves — now the fourth-largest in the world at more than $680 billion — to limit the rupee’s sharp swings.

China is bracing for further yuan weakness if US President-elect Trump follows through with his pledge of imposing tariffs of as much as 60% on Chinese goods. The impact will reflect in currency weaknesses and trade flows across Asia. Keeping a tight lid on rupee in such a situation could further widen India’s trade gap with China, after it doubled in last three years to nearly $83 billion in 2023.

“Given overvaluation concerns and to keep the rupee competitive – especially with a weakening yuan – the central bank could prefer an orderly depreciation in the rupee over the coming year,” HDFC Bank economists led by Abheek Barua wrote in a note.

India is looking to boost its manufacturing sector by attracting businesses wanting to relocate supply chains from China. To do that, policymakers need to keep the rupee competitive against its peers. India had just started taking export market share from China in sectors such as electronics exports.

A central bank spokesperson didn’t reply to an email seeking comment. 

The rupee has traded in the 11.50-12 band against the yuan for most of the year. Both the currencies have broadly depreciated in line against the dollar so far in 2024 — the yuan is down 0.9%, while the rupee has dropped 1.4%.

The previous tariff war during Trump’s first presidency saw the yuan fall 11.5% against the dollar in 2018-19 and offset two-third of the tariff hike, according to Morgan Stanley. In the same period, the rupee dropped 11.2%.

“The RBI has been softly pegging INR against CNY, amid 40% of bilateral trade deficit with China and is unlikely to let INR float naturally,” said Madhavi Arora, lead economist at Emkay Global Financial Services Ltd.