Indian rupee slides on widening trade deficits

India’s widening trade deficit and elevated commodity prices have dented the rupee, reinforcing a recent downward bias and pushing it toward a new low amid prediction that the currency would plummet to 76 per dollar by year-end.

The rupee was trading at 74.4563 to the dollar on Monday while Brent crude, the benchmark for India’s oil imports, was above $75 per barrel, up more than 45 per cent since the start of the year.

This volatility and the prospect of tapering by the Federal Reserve have also reduced the attractiveness of India’s currency for carry trades, adding to its headwinds.

“We expect oil and broader commodity complex prices to remain elevated in the short term, which will weigh on India’s trade balance,” said Standard Chartered’s Parul Mittal Sinha. “We maintain a bearish view on the rupee,” said Sinha, who heads the bank’s India financial markets and macro trading for South Asia.

Standard Chartered and RBL Bank Ltd. forecast the currency to depreciate to 76 per dollar by year-end, while their peers at Deutsche Bank AG have a slightly less pessimistic projection of 75.

After falling to an eight-month low in May, India’s trade deficits aggregated at $9.4 billion during June despite exports surging by 47.34 per cent to $32.46 billion on account of healthy growth in sectors such as engineering, gems and jewellery and petroleum products, , according to the data released by the commerce ministry on Friday.

Exports in June last year stood at $22 billion and $25 billion in June 2019. In May 2021, the outward shipment was worth $32.27 billion, while in April this year, it was $31 billion. Imports in June 2021 grew by 96.33 per cent to $41.86 billion, from $21.32 billion in June last year. In June 2019, imports stood at $41 billion.

"India is thus a net importer in June 2021 with a trade deficit of $9.4 billion, widened by 1,426.6 per cent over trade surplus of $0.71 billion in June 2020 (India was net exporter in June 2020) and narrowed down by 41.26 per cent over trade deficit of $16 billion in June 2019," the ministry said in a statement.

Kotak Mahindra Bank Ltd. estimates that billion dollar deficits will continue and average in the “double digits” as the economy reopens.

Technical indicators also point to further depreciation of the currency given the dollar-rupee's moving average convergence-divergence gauge, a measure of momentum, remains above zero in bullish territory. The pair has room to run before reaching resistance at April’s peak of 75.3362.

The Reserve Bank of India also has $600 billion of currency reserves to draw on to curb any sharp fall in the rupee.

‘”We expect the RBI to remain proactive with its FX intervention strategy to ensure limited volatility in the rupee and to prevent excessive rupee depreciation from feeding into inflation,” said Kaushik Das, chief India economist at Deutsche Bank.

— issacjohn@khaleejtimes.com

Issac John

Editorial Director of Khaleej Times, is a well-connected Indian journalist and an economic and financial commentator. He has been in the UAE's mainstream journalism for 35 years, including 23 years with Khaleej Times. A post-graduate in English and graduate in economics, he has won over two dozen awards. Acclaimed for his authentic and insightful analysis of global and regional businesses and economic trends, he is respected for his astute understanding of the local business scene.