Widening Trade Deficit Trend To Pressure Rupee Further: Acuite Ratings

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Acuit Ratings expects higher trade deficit would push rupee to 78 per dollar

India’s merchandise trade deficit jumped by nearly a third to $20.11 billion in April from a year even as exports surged around 31 per cent to a new high of $40.19 billion, which were offset by a rise in imports by about 31 per cent to $60.3 billion.

That widening trade deficit trend will weigh further on the rupee, which hit new record lows repeatedly last week, according to Acuité Ratings.

On May 9, Monday, the rupee closed at a record low – at that time – of 77.44 against the dollar and during the session, it breached 77.50 per dollar at different times to repeatedly break its lifetime intra-day lows. 

On Thursday, the currency ended at a new all-time low of 77.50 after hitting a fresh intra-day weak level of 77.63 against the American currency.

On Friday, the currency recovered a bit to end at 77.31 as the RBI intervened in the open market to stem losses. The foreign exchange (forex) market in India was shut on Monday because of the Buddha Purnima holiday. The currency had previously breached 77 against the dollar earlier in March for the first time ever.

But if the imports continue to outweigh exports, based on the trend in recent months and the latest expectations, the risks are tilted toward more downside for the rupee.

“The expansion of trade deficit in Apr-22 is in line with seasonality trends. In addition, the trade deficit widened on account of the higher petroleum trade deficit, a manifestation of the sharp acceleration in crude oil prices triggered by the Russia-Ukraine conflict. For FY23,  Acuité continues to project current account deficit to widen to $85 billion from an estimated level of $44 billion,” noted analysts at Acuité Ratings.

“Higher trade and current account deficit expectations, apart from strong capital outflows due to rate hikes in developed economies, have put pressure on the rupee, which has already breached the INR/USD 77.0 mark and may touch 78.0 shortly,” noted analysts at Acuité Ratings.

The rupee’s slump has been broad and deep, driven by capital outflows from emerging markets as Russia’s attack on Ukraine and the resultant Western sanctions, in turn, have disrupted supply chains further – leading to a surge in commodity prices and runaway inflation globally. 

That inflation surge has pushed most major central banks on a hyper-hawkish path, and investors have sought safety due to fears about global growth and sheltered in the US dollar.

On Monday, the greenback started the week just off a 20-year high against peers. 

Investors have flocked to the safe-haven currency on concerns about the US Federal Reserve’s ability to dampen inflation without causing a recession, along with worries about slowing growth arising from the Ukraine crisis and the economic effects of China’s zero-COVID-19 policy.

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