Trump risk: The rupee could get caught in the crossfire of a currency

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Subscribe to enjoy similar stories. Nothing has consumed more ‘little grey cells’ than discussions on the United States presidential election, the contenders and their impact on the fate of the global economy after this “mother of all US elections." Even with the election now out of the way, economic uncertainty and volatility are here to stay, given fractures in society (and thus the polity) across the developed world. The focus thus far has been on foreign portfolio flows, interest rates, the policy stance of central banks and at times their liquidity management.

However, post the US polls, an important variable that will likely come under the spotlight is the Indian rupee’s exchange value and the US election might prove to be a game-changer for forex markets. The rupee may well have to bear a greater burden of adjustment to global economic volatility from here on, as emerging markets (EMs) get into the crosshairs of a gyrating dollar and US-China policy tangles. The Reserve Bank of India (RBI) has done a remarkable job in keeping the currency steady in times of geopolitical and geo-economic upheaval.

The rupee hit a series of record lows in October. In November, it has already depreciated 0.36% against the dollar, prompting intervention by RBI, which has managed to keep it one of the least volatile major Asian currencies. The rupee’s near-term volatility measured through the 7-day daily realized volatility was just 0.1%, the lowest in at least 30 years.

Might all that change with a change in the White House? The dollar is at its strongest in recent memory. Viewed through the prism of purchasing power parity, it is more overvalued than at any point since the mid-1980s. Its level is hard to justify even after accounting