As global currencies weaken against the U.S. dollar following Donald Trump’s election victory, emerging markets (EMs) are bearing the brunt. However, India appears to be in a comparatively stronger position than many of its Asian peers, particularly due to its lower dependency on trade with China, according to a report by Emkay.
The report highlights that India has the smallest exports-to-GDP ratio and the lowest share of exports directed towards China among EM Asian countries, which provides a buffer against the fluctuations in Chinese demand that are currently unsettling regional economies. “India is relatively better positioned in terms of trade linkages with China compared to other EM Asian peers, thanks to its minimal exports-to-GDP ratio and low reliance on exports to China,” the report said.
Despite this advantage, India’s trade ties with China and other Asian economies have grown over the past decade. Consequently, India is not completely insulated from potential “second-round” effects if China’s economy slows further, especially given the weakening yuan and other regional currencies. This trend could exert natural downward pressure on the Indian rupee, driven by broader currency movements across Asia led by the yuan.
The report warns of an impending “FX war” as a significant risk, where China might keep its currency low to sustain competitiveness amid shifting global trade dynamics and growing Western resistance to Chinese exports. Such competitive currency depreciation could ignite heightened volatility in global foreign exchange markets over the coming years.
“The FX wars could emerge as the biggest asset-class risk over the next few years,” the report added, as global markets prepare for possible ripple effects.
Further complicating matters, the U.S. dollar’s rise has been bolstered by a recent policy shift by the U.S. Federal Reserve, following a notable 50-basis-point rate cut in September. Strengthening U.S. economic data has also contributed to the dollar’s appeal for investors, amplifying challenges for other currencies, including those across Asia.
(Inputs from ANI)
