IGI Logo

Below the Perspective by Ms. Riya Singh – Research Analyst, Commodities and Currency , Emkay Global

India’s Trade Deficit and Rupee Challenges

* India is facing mounting economic pressures as its trade deficit soared to a record high of $37.8 billion in November, up sharply from $27.1 billion in October. This significant gap, driven by record gold imports and a sharp decline in exports, has brought renewed focus on the Indian rupee and the Reserve Bank of India’s (RBI) strategies to manage the currency’s stability. November saw imports climb to an unprecedented $70 billion, up from $66.3 billion in October. Gold imports alone accounted for $14.8 billion, surpassing the previous high of $10.1 billion in August. This spike followed the government’s July decision to slash import duties on gold from 15% to 6%. Other factors contributing to the increase include heightened demand for energy commodities and essential goods, reflecting India’s strong consumption-driven economy. Exports dropped to $32.1 billion from $39.2 billion in October, underscoring faltering global demand and heightened trade tensions. Key sectors like textiles, engineering goods, and chemicals experienced contractions.

* The wider trade deficit has placed significant downward pressure on the rupee, which now flirts with the 85-per-dollar threshold. Despite RBI’s active intervention, including foreign exchange sales amounting to $36.4 billion since October, the rupee continues to face depreciation risks. India’s foreign exchange reserves have fallen by $50 billion since September, standing at $654.9 billion as of December 6. This decline reflects both the RBI’s market interventions and valuation effects from a stronger dollar and elevated global yields.

* Foreign investors have turned cautious, with net outflows of $532.2 million in debt markets on December 12, the highest since October. This underscores the broader challenges India faces in attracting capital amid global dollar strength and higher US Treasury yields. On a brighter note, December’s flash PMI data paints an optimistic picture. The services PMI rose to 60.8 from 58.4, and the manufacturing PMI increased to 57.4 from 56.5, signaling robust expansion. Improved domestic demand and business confidence could provide a cushion against external headwinds.

* With inflationary pressures easing, as evidenced by November’s wholesale price index (WPI) rising just 1.89% year-on-year, expectation is that the RBI may pivot towards an accommodative stance in 2024 to spur growth.

* The rupee’s trajectory remains under strain. While RBI interventions may temper volatility, structural challenges, including twin deficits and weak export performance, persist. Sustained dollar strength and rising global interest rates add to the rupee’s vulnerability. USD/INR pair may break off the resistance level of 85.00, with potential depreciation towards at 85.18 – 85.35. Conversely, a breach below 84.78 could expose support levels near 84.50.

Above views are of the author and not of the website kindly read disclaimer