Emerging Markets and the Strengthening Dollar
The Indian stock market, already experiencing volatility, has faced significant pressure recently. A growing trend among foreign investors involves reallocating funds toward countries like China and Japan, resulting in a lag effect on India’s performance due to the Yen Carry Trade—a financial strategy that took a toll on global markets back in July. This week, India opened on a weak note, contrasting with the stronger global trends, further highlighting the impact of a revised GDP growth forecast by the Reserve Bank of India (RBI), recently reduced from an initial 7.2% to 7.0% for Q2.
A market survey now forecasts growth in the range of 6.4% to 6.8%, below the earlier projected 6.7%. Contributing factors include reduced government spending ahead of national and state elections and a slowdown in urban demand, mirroring global inflationary pressures and higher interest rates. India’s stock market is trading at an 80% premium compared to other EMs, prompting foreign institutional investors (FIIs) to exit as Q2 corporate earnings underperform. Earnings growth estimates have been revised to single-digit projections, with a slight recovery expected only by Q3 and Q4.
Trump’s Economic Vision: A Double-Edged Sword for Global MarketsTrump’s victory has invigorated the U.S. stock market, which has surged by 5% since early October, largely driven by anticipation of tax cuts and government spending under his administration’s economic policy, popularly termed “Trumponomics.” While this is welcome news for U.S. investors, it has raised concerns for economies with significant trade deficits with the U.S., including China, Germany, and Japan. India ranks ninth in trade deficit with the U.S., with a 5.8% deficit as of 2023, though it may have a slight buffer owing to its relatively diversified trade relationships.
For emerging markets, the rise of the dollar alongside anticipated interest rate hikes could lead to reduced foreign investment, currency depreciation, and heightened economic volatility. This dollar rally—bolstered by expectations of fiscal expansion in the U.S.—may prompt EMs to grapple with a capital outflow, shrinking USD availability, and inflationary pressures from higher import costs. U.S. bond yields are forecasted to rise, especially with Trump’s stricter immigration controls and anticipated higher inflation spurred by government spending, which could depreciate currencies in Asia, including India’s INR.
India’s Strategic Position Amid Shifting Trade Dynamics
For India, Trump’s policies present both risks and opportunities. His strong stance on reducing trade with China could open doors for India in the outsourcing sector, as companies seek alternatives in the region. However, India could face challenges if China responds to declining U.S. demand by aggressively expanding exports to other countries, including India—a move that might harm local industries. The robust personal rapport between Trump and Indian Prime Minister Narendra Modi may serve as a diplomatic buffer, potentially averting major disruptions in trade relations.
Further, the RBI’s strong forex reserves are expected to curb INR volatility, while potential inflows from India’s inclusion in global bond indices could stabilize the currency. Immigration, a contentious topic in U.S.-India relations, may surface again as Trump’s administration enforces stricter immigration policies. Given the relatively favorable outcome during his first term, where an increase in minimum wage costs helped temper the issue, further escalations are unlikely, but businesses are watching closely.
Market Outlook: Navigating Uncertainty and Opportunity
India’s current underperformance compared to global markets underscores the uncertainty as the effects of “Trumponomics” unfold. The evolving landscape brings both potential setbacks from a stronger dollar and inflationary pressures and potential gains from enhanced trade and outsourcing opportunities. The trajectory of India’s market will depend largely on its ability to leverage global shifts while ensuring domestic resilience through steady monetary policy, strategic fiscal planning, and investor confidence in the latter half of FY25.
In conclusion, while Trump’s policies may buoy the U.S. market, EMs are bracing for a complex environment. For India, navigating this global shift demands a careful balance of diplomatic engagement, economic diversification, and policy responsiveness to maintain stability amidst the evolving economic landscape.
