BREAKINGVIEWS-India counts the cost of its US trade deal limbo

By Shritama Bose

MUMBAI, Dec 9 (Reuters Breakingviews) - India’s trade frictions with Washington are rippling through the rupee INR=IN. Its sharp 3% decline against the U.S. dollar USD= since late October, when the United States slapped fresh sanctions on two Russian oil producers, equals the currency's entire loss of value in 2024. Overall it has fallen more than 5% against the greenback this year, making it Asia’s worst performer. It's a sobering reality check for New Delhi.

A steady rupee was one of the defining features of India’s moment on the global stage in recent years. It underpinned macro stability, and lured fund managers to redirect capital to the world’s fifth-largest economy as sentiment toward China cooled. That's all changed after U.S. President Donald Trump pushed tariffs on U.S. imports from India up to 50% - including an additional 25% levy to pressure New Delhi to cut oil purchases from Russia.

Now the South Asian country's goods exports are shrinking and it logged a record trade deficit of $41.7 billion in October. Indian refiners, including Reliance Industries RELI.NS, are also weaning themselves off cheap crude from Moscow, and the higher cost of energy imports will eventually show up on the country’s external balance of payments.

True, India’s economy is stronger than in 2013, when fears of the U.S. Federal Reserve's winding down of asset purchases triggered an exodus of foreign money. Both its current account deficit and the central government's fiscal deficit have narrowed, and the Reserve Bank of India now sits on $686 billion of foreign exchange reserves - enough to cover more than 11 months of imports, up from about six months in 2013. But India's fortunes are a sharp contrast to China's, whose trade surplus just topped $1 trillion for the first time despite punitive U.S. tariffs.

U.S. trade representatives are set to visit India this week, but until a favourable deal materialises and the rupee stabilises, global investors accustomed to the currency's steady moves will hesitate to deploy fresh capital.

For now, India is serving more as a fundraising hub: foreign institutional investors have offloaded nearly $30 billion of Indian equities since September 2024 -- the second-largest absolute outflow in two decades, according to Goldman Sachs. For a country eager to attract inflows, the stakes in its standoff with Washington are rising fast.

Follow Shritama Bose on LinkedIn and X.

CONTEXT NEWS

The Indian rupee closed at 89.98 per U.S. dollar on December 5 after hitting an all-time low of 90.42 the prior week. The Reserve Bank of India will tolerate a weaker rupee as the country's external sector confronts a wider trade gap and stalling of dollar inflows, Reuters reported on December 4, citing three sources familiar with the central bank's thinking.