CNBC-TV18 spoke with Neeraj Gambhir, Head of Markets at Axis Bank, and Mitul Kotecha, Head of FX & EM Macro Strategy Asia at Barclays, to discuss how a Trump victory could impact global and Indian financial markets.
Gambhir and Kotecha suggest that a Trump win may lead to a stronger dollar and higher US bond yields, putting pressure on emerging market currencies, including the Indian rupee.
However, they believe the Indian rupee is currently very well managed by the Reserve Bank of India and may not see the same level of weakness as may be seen in some of the other EM currencies.
They also explore the implications of tariffs and monetary policy shifts under a Trump-led administration, which could add volatility and raise inflation risks.
These are the edited transcript of the interview:
Q. We’re seeing equities for all Indian equities, Chinese equities. Is the market already pricing in a Trump victory?
Mitul: I think that’s the way that the market has been moving in recent sessions, and what we’ve seen, notwithstanding an Iowa poll over the weekend, which did seem to show Harris taking a lead, but generally the betting odds and the market has been shifting towards a Trump win. And even though it’s still very close. For example, we’ve looked at the premium that’s in the US dollar. We think the dollar premium is already about 3% priced in for a Trump victory. You could argue the same for other assets as well. If we do see a Trump win, we could still see some continued moves in the same direction, but some of that is priced in already.
Of course, if Harris wins, you would see a reversal of some of that premium that’s been built in on expectations of a Trump win. For example, you could see a weaker dollar, and lower rates to some extent, as US rate markets have been selling off under the expectation that we would see much wider fiscal deficits under a Trump or a red sweep outcome coming through in the elections.
Q. A 4.38% on the 10-year after dismal jobs data clearly indicates that they’re not pricing in a weak economy or rate cuts, but rather a Trump victory and perhaps higher tariffs and higher inflation. What would it be from an Indian point of view?
Neeraj: On the fixed income side, the Trump victory means significantly higher, or even somewhat higher bond yields. It’s in general bonds negative across the world. Domestically also we’ve seen the bond yields actually react to it, although in a very sort of calibrated and muted way, only 10 basis points higher moved so far. But it certainly kind of makes the whole story about a sustained lower interest rate regime in the US a bit questionable.
The second point is on the currencies. If we see Trump victory resulting in a stronger dollar, obviously it is all EM negative, and we’ll continue to see an impact of that on Indian rupee as well, although Indian rupee seems to be range bound right now and well managed in terms of central bank intervention and one of the lowest in EMs.
So we will see some bit of a mutual response on both the sides because both these markets eventually react a lot more to the domestic data as compared to the international data. But there is going to be some rub off effect of higher yields and the higher dollar on the domestic markets.
Q. The extreme reaction seen in case of a Trump victory is the raising of tariffs on China and of course in general. If that were to happen, China would react with depreciating its currency, and the expectation is that India will have to do competitive depreciation. So does a Trump victory mean weaker rupee?
Neeraj: A lot of this will play out over the next six to 12 months, period after the US President is inaugurated, which is in January. There is a lot of rhetoric right now, but how much of that translates into actual action remains to be seen. Higher tariffs are probably given at this point in time. But does that mean a 10% global higher tariff, as Trump has talked about a 60% tariff for China. I’m not sure how much of this is negotiation tactic or how much of this is actually going to be implemented.
In general, if you see higher tariffs from US, it also basically means higher inflationary environment in US. So in some senses, the question is whether Trump wants to see a stronger dollar or a weaker dollar. So there is a lot of these variables which are at play at this point in time for us to take a very strong directional call. We need to see how this entire story plays out.
If they follow through with higher tariffs across the board, and we see continued strength in the dollar, then obviously it is weakness for emerging market currencies. But again, I’m saying that Indian rupee is very well managed and we may not see the same level of weakness in rupee as we see in some of the other EM currencies.
Q. We should also consider a deadlocked government because of different majorities in the presidency and in Congress. If that were to happen, what should we be prepared for in terms of currency and rate reaction?
Mitul: If there is a split Congress, it would certainly send a more muted signal to the market. Clearly, what we’ve seen is a reaction here, potentially to a red sweep or a Trump win, being more extreme, and the chances of a blue sweep seem to be more limited, because at this moment in time, the polling seems to show that Congress, in terms of the Senate, is more likely to shift into Republican hands.
The House could stay Democrat, but again, it’s a close call. But the chances of a red sweep and a Trump win seem to be higher. But if there is a split Congress, some of the more extreme policy measures probably on either side would be tampered down, and in that sense, you’d probably you may even see a bit of relief in markets in that sense. Rates may be more contained, and therefore, emerging market rates markets may find some relief. The dollar may also lose a bit of steam in a split Congress, and you may see some relief there as well for EM assets. But overall, we are gearing up for a very binary outcome at this point in time. There is a lot of de-risking that’s been taking place among investors in last couple of weeks or so.
So we would also see a very significant chance of an increase in volatility post the election outcome, either in any outcome where we could see this sort of binary event coming through. I don’t think that emerging markets are out of the woods or asset markets is generally out of woods.
I would agree that the Indian rupee and Indian assets are far more isolated and unlikely to be impacted as much.
Q. The rhetoric is more to get bargaining power and not exactly actually implement 50 or 60% tariffs on Chinese goods or across the board. Tax cuts are more likely. What is your range for the dollar index and the US 10 year?
Mitul: The bottom line is, it would suggest dollar higher. US rates also higher. But, rates have already moved a lot in the US. Part of that is on better data in the US, so we may not see such a sharp move in US rate markets on the back of it because so much has been priced more recently. It’s unlikely that US rates are going to come off quickly. If Trump wins, we probably may see a knee jerk sell off. The yield curve may be moving higher across the curve.
Q. What would be the ranges you will work with for the rupee and Indian bonds?
Neeraj: Assuming we have an extreme case of Trump victory and markets will quite significantly post that I still see 10 year bond yields capped at around 7% for now, because Indian reaction will be somewhat more muted. On rupee, even a 1% move is difficult to imagine. Currently it is at about 84 level. I would think that beyond 84.5 or maybe 84.75 in the worst case.
So, 0.5% to 0.75% move on rupee and another 10 to 15 basis points on bonds.
Q. What do you expect from the Fed?
Mitul: We think 25 basis points (bps) this week, 25 bps in December.
Neeraj: We think 25 bps this week is given. I am not very sure of 25 bps in December.
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