The Trump effect

Trump's hawkish stance and Fed's inclination to hike rates could spell doom for emerging markets

Akash Prakash’s article, “Determining the dollar in Trump’s America” (January 24), is spot on with the way the US currency is inching up among a basket of currencies.

US President Donald Trump’s hawkish stance and the Federal Reserve’s inclination towards three rate hikes could spell doom for emerging markets, especially India, which is reeling under downward pressure on the rupee due to FCNR obligations — even though the Reserve Bank of India was ready with future swaps — and foreign institutional investors (FII) being net sellers in the equity market. 

FIIs sold Rs 21,000 crore of equity in November last year — Trump was elected on the 9th of the month — and Rs 11,300 crore in December while domestic institutional investors have been saving us by being net buyers. With rupee at Rs 68.15 versus a dollar, there will be pressure if FIIs continue to be net sellers.

Trump’s fiscal policy aids interest rate hikes, which would further reduce the interest rate differential between Indian and US equities and debt. Although the RBI has record reserves to conduct open market operations, the situation was exacerbated by demonetisation. Budget 2017 and the National Democratic Alliance’s fortunes in the Assembly elections will be closely monitored by Dalal Street investors.

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