Rupee plunges to record low of 70.40 as trade deficit widens
Heightened global uncertainty is likely to keep the domestic currency under pressure
MUMBAI: The Indian rupee slumped to a record low of 70.40 against the US dollar on Thursday before ending the day at 70.16 a dollar, down 0.38% from its Tuesday’s close of 69.89. The country’s trade deficit, too, widened to a five-year high as petroleum imports surged.
The 10-year bond yield ended at 7.863%, from its previous close of 7.818%. Bond yields and prices move in opposite directions. On Wednesday, markets were closed due to Independence Day.
“In recent months, activity indicators such as global PMI and world trade volumes have moderated. This along with an overvalued rupee could weigh on India’s exports and thus growth recovery. As a result, we think the trade balance will likely remain elevated, albeit lower than the July print. Widening trade deficit amid heightened global uncertainty is likely to keep the INR (rupee) under pressure,” said Edelweiss Securities in a August 14 report to its investors.
According to government data, trade deficit widened to $18.02 billion in July, compared with the $15.7 billion median estimate in a Bloomberg survey of 24 economists, and $16.6 billion in June. In May 2013, India had reported trade deficit of $19.1 billion, according to data compiled by Bloomberg. Merchandise exports last month rose to $25.77 billion from a year ago, while imports rose 28.81% to $43.79 billion. Oil imports surged 57.41% to $12.35 billion.
“We believe that downside risks to export growth remain due to weaker global growth outlook, although currency depreciation is a tailwind at the margin and could provide some relief to exporters (who are recovering from the tumult of slow resolution of stuck GST refunds and tighter trade finance). Import growth, meanwhile, is likely to remain elevated in the near-term due to high oil prices, but we expect a weak rupee and domestic slowdown to moderate imports in coming quarters,” said Nomura Research in a report to its investors.
“Overall, we expect the current account deficit to widen to 2.8% of GDP in FY19 from 1.9% in FY18. We expect balance of payment funding to remain a challenge in FY19 as the basic BOP (current account plus net FDI) is negative and portfolio flows also remain negative,” the Nomura Research report added.
The Benchmark Sensex Index fell 0.5%, or 188.44 points, to 37,663.56 at the end of the day’s trade on Thursday.
Traders will keep an eye on the release of the minutes of the Reserve Bank of India’s policy meeting held on 1 August, which is due later today.
“The RBI’S minutes due today will be backward looking and will not capture the recent escalation in financial markets volatility. Nonetheless, the members were likely cautious on the direction of core inflation, risk of generalised price pressures, expansionary fiscal policies, closing output gap and rupee weakness, at the margin, which prompted their hand to pre-emptively hike rates in August despite an anticipated moderation in inflation, July onwards,” said Radhika Rao economist at DBS Bank.
“Inflationary risks have receded for the short-term, and was helped by base effects and seasonal factors, but the rupee direction and oil threaten to harden inflationary expectations. The policy committee front loaded rate hikes, but more increases are likely if the financial markets sell-off intensifies (as rupee slips to a record low) and core inflation proves sticky. Regional central banks have also been on the defensive, following BSP’S 50 bps hike this month and BI’S surprise move yesterday,” Rao added.