Trump 2.0 and its impact on 3Is: Interest rates, inflation & India 

In its November 2024 policy meeting, Federal Reserve Chair Jerome Powell announced a 25 basis point (bps) cut in the federal funds rate, lowering it to a target range of 4.50% to 4.75%. This move followed a larger-than-anticipated 50 bps cut in September, marking a gradual pivot by the Fed amid a cooling US labour market, sticky but moderating core inflation, and softened crude oil prices.

On November 6, 2024, the U.S. elected Donald Trump as its 47th president, with the former leader returning to office after a decisive victory over Democratic candidate Kamala Harris. The implications of Donald Trump’s election win on U.S. economic and foreign policy was immediately signalled by a 6% rally in the Dollar Index on election day.

Some of the President-elect’s key promises—pledging blanket tariffs on all imports, tighter immigration controls, and tax cuts—could not only worsen the already ballooning U.S. fiscal deficit but also could be potentially introduce inflationary pressures in the US economy, thus forcing the Fed to reverse its course.

This divergence between fiscal and monetary policy raises the likelihood of persistently high interest rates, beyond current market expectations. This was also witnessed when, despite the Fed’s 50 bps rate cut in September, the U.S. 10-year Treasury yield surged by 70 bps, suggesting that structural factors, rather than Fed adjustments alone, may drive long-term rates.

President Trump’s return brings renewed unpredictability to global geopolitical and economic stability. His stance on Middle Eastern and the Russia-Ukraine conflicts could amplify volatility in an already fragile global environment.

For emerging markets, this could mean heightened uncertainty, weaker currencies, and potentially higher capital outflows. India, for instance, saw a record ₹95,000 crore in foreign capital outflows in October 2024, while the rupee depreciated to historic lows against the dollar. Although a peaceful resolution of these wars may potentially reduce global commodity prices in the medium term, thus benefiting large oil-importing emerging economies such as India.

Moreover, President Trump’s hawkish stance on China that may be summed-up by “ABC” “All but China” may present India with opportunities to expand local manufacturing. Strong ties between the leaders of India and the U.S. could lead to enhanced cooperation in defence, technology, and trade, bolstering India’s strategic positioning.

India’s relatively stable economy, coupled with stable political leadership and abundant foreign exchange reserves, equips it well to successfully weather choppy waters. With these fundamentals in place, India has the potential not only to navigate these uncertainties but also to leverage them as it pursues its ambition of becoming a $10 trillion economy by the next decade.

(The authors Ishit Doshi is a 2nd Year PGP Student at IIM Kozhikode and Shubhasis Dey is a Professor of Economics at IIM Kozhikode. Views are own)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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