Should India Worry About a Strong US Dollar?

The Indian economy, including the capital markets, remain well-prepared to deal with the potential volatility in US Dollar (USD) exchange rates under the upcoming Trump presidency, a financial expert told Sputnik India, as the President-elect threatened the BRICS economies with 100% tariffs if they work towards replacing the greenback in international trade.

Arun Kejriwal, the Founder and Director at the investment advisory firm KRIS, described the recent rally in USD vis-a-vis gold futures on the back of Trump's warning as temporary, adding that gold would continue to outperform the USD in the longer run.

"Gold is a commodity which even experts don't understand. Gold prices tend to go up during the time of a geopolitical crisis. Another trend observed is that gold prices going up indicate that capital market indices would go down. Though the trend has been somewhat different in FY 2024-25, gold will continue to be the safe haven whenever there is a geopolitical uncertainty. And we still have pockets of concern in China-Taiwan theatre, Middle-East and eastern Europe," Kejriwal explained in a conversation with Sputnik India.

Commenting on the depreciation of Indian Rupee (INR) against the USD, a ratio of vital significance to the Reserve Bank of India (RBI), Kejriwal highlighted that neither all of India's foreign trade nor all of its forex reserves were just in USD, affording India a cushion from volatility in USD.

"The Indian Rupee has depreciated against the US Dollar in recent years, but it remains strong vis-a-vis other currencies. It showed the least depreciation vis-a-vis the USD as compared to other major currencies. So, there would be some impact, but not a total impact per se," stated Kejriwal, adding that the India's current forex reserves comprised a mixed basket for foreign currency assets, gold, special drawing rights (SDRs) and the reserves with the International Monetary Fund (IMF).

Significantly, the INR has depreciated from costing 59.44 for a USD in 2014 to an all-time low of 84.60 last week, before slightly recovering later.

Previously, a higher USD exchange rate was seen as against India's economic interests due to higher energy import and other bills, given the fact that the country's "import dependency" on crude stood at an all-time high of 87.7% in 2023-24, according to official data from the Petroleum Planning and Analysis Cell (PPAC).

But, since 2022, as Russia overtook the Gulf countries to become India's largest oil supplier, India somewhat shielded itself from the USD vagaries, with the import bill decreasing in 2023-24 despite a higher import dependency, according to PPAC. In fact, Russian Deputy Prime Minister Denis Manturov said in November that 90% of India-Russia trade was being conducted in local currencies, in what's a blow to the hegemony of the petrodollar.

Last year, India's Foreign Trade Policy (FTP) also called for encouraging trade settlements in INR. At present, over 22 foreign banks have opened vostro accounts with Indian banks to facilitate INR trading.

At the same time, certain export-oriented sectors could reap the windfalls accrued due to a strong USD, Kejriwal pointed out.

"The IT Sector is India's best bet when it comes to reaping the benefits of a strong USD, given a sizeable presence of Indian IT companies in the North American geography," the analyst forecast, noting that the services sector contributed around 54.7% of the Indian GDP, as compared to 17.7% for agriculture and 27.6% for industries/manufacturing.

Meanwhile, India's concerted push to bolster exports as the government incentivises domestic manufacturing under the 'Make in India' initiative would benefit from a strong USD, given majority of India's trade is still conducted in USD, Kejriwal remarked.

India has significantly improved its capacity to export refined fuel products, sugar, agrochemical products, electronics and precious and semi-precious stones among others between 2014 and 2023, thus contributing to the forex reserves, according to Department of Commerce (DoC) data released on Monday.

Kejriwal said that Trump's push to move manufacturing back to the US would face headwinds.

"What I would like to note here is that the US, at least for the last 10-15 years, have stopped manufacturing basic items. They no longer have an existing manufacturing ecosystem to produce such goods, necessitating their imports. If Trump chooses to carry out his threat to impose tariffs on foreign imports, it would only make life more expensive and difficult for a common American," he explained.

As far as Indian markets and economy was concerned, Kejriwal stated that a strong USD wasn't the only factor for Indian policymakers. He didn't agree with the notion that a strong USD would impact economic recovery, given that the July-September figures released in the last week of November pegged the GDP growth rate at a seven-quarter low of 5.4%.

"A strong USD won't be the only external factor impacting India. We need to look at other factors, including Trump's tariff threats, US-China ties, etc," Kejriwal concluded.

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