(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

By Shritama Bose

MUMBAI, Jan 13 (Reuters Breakingviews) - India is losing its taste for a strong currency. Following a two-year period of trading in an extraordinarily tight range against the U.S. dollar, the rupee is plumbing fresh lows in the run-up to a second Donald Trump presidency. Some depreciation is necessary but a rapidly weakening yuan complicates the equation.

The emerging market with an export target of $2 trillion by 2030 is uncompetitive against rival economies. Late last year, the rupee was at its most overvalued level against a basket of 40 peer currencies in two decades, according to Reserve Bank of India data. It lost 1% of its value against the U.S. dollar in the year to late November, roughly the same as the yuan, compared to the typical depreciation of 2-3% a year investors expect from the rupee.

New Delhi is coming round to the view that India has failed to capture the benefit of supply chains moving beyond China as effectively as countries like Vietnam and Mexico. While high import levies are partly responsible for that, the rupee's relative strength is an added deterrent for producers looking to make in India for the world.

Other incentives for the central bank's new governor, Sanjay Malhotra, to burn through its $635 billion of foreign exchange reserves to prop up the rupee are fading too. Those reserves have dropped to a 10-month low. The widening trade deficit signals a need to curb imports, foreign direct investment is stalling and the pull on portfolio inflows has weakened with India's stretched equity valuations. Meanwhile, GDP growth in the year to March 2025 is forecast to slow to 6.4%.

One option for policymakers to correct some of these problems is to allow the rupee to track the Chinese currency. That would boost the attractiveness of India's exports and also help the South Asian country avoid a flood of cheap imports from its neighbour.

Yet the yuan's weakness may accelerate sharply once Trump's trade policies become clearer after he takes office on Jan. 20. A sharply weaker rupee could lead to a surge in India's sizeable oil import bill, and worsen domestic inflation, especially as tougher U.S. sanctions on Russian producers are set to boost energy prices. Investors will have to brace themselves while India charts a new course.

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CONTEXT NEWS

The Indian rupee dropped to an all-time low of 85.97 against the U.S. dollar on Jan. 10, pressured by firmness in the greenback ahead of key labour market data.

India's central bank is ready to let the rupee weaken in tandem with the Chinese yuan after Donald Trump’s election win spurred fears of higher US tariffs, Bloomberg reported on Nov. 11, citing unnamed people familiar with the thinking of policymakers.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic: The Indian rupee is at its most overvalued in 20 years

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(Editing by Una Gaqlani and Aditya Srivastav)

((For previous columns by the author, Reuters customers can click on shritama.bose@thomsonreuters.com))