A man holds a two thousand Indian rupee banknote (Photographer: Dhiraj Singh/Bloomberg)

Rupee Closes Below 70/$ As Widening Trade Gap Adds To Woes

The Indian rupee closed below the 70-per-dollar mark for the first time, after data released on Tuesday showed that trade deficit widened to the most in five years.

The Indian currency fell 0.4 percent to close at 70.15 against the dollar. The rupee had dropped to 70.39 in early trading, breaching the earlier intraday low of 70.08 reached on Tuesday.

The domestic currency has fallen 2.29 percent so far this month, weighed down by the Turkish lira-led emerging market currency rout.

The gap between India’s exports and imports reached $18 billion in July, led by a higher oil import bill, according to data released by India’s commerce ministry on Tuesday. That’s higher than the $15.7 billion median estimated in a Bloomberg survey of 24 economists.

A trade shortfall will now add pressure on the country’s current account deficit, said Aditi Nayar, principal economist at ICRA, in a note.

“The current account deficit is likely to widen to $16-17 billion or around 2.5 percent of gross domestic product in the first quarter of financial year 2018-19, from $14 billion in the corresponding quarter, with higher commodity prices offsetting the benefit of the contraction in gold imports,” she said.

This jump in trade gap is “worryingly high”, said a note by Credit Suisse. Strong growth in non-oil imports points to a broad-based demand uptick in the economy. However, the surge in trade deficit makes the trend unsustainable without a “parallel jump in capital inflows, which looks unlikely for now,” the report said.

The choice for policymakers is between higher retail fuel prices to slow oil demand and a weaker rupee.
Credit Suisse Report