The widening of the trade deficit to new record highs has led to further depreciation of the Indian rupee against the dollar. The local currency will reach 81 by the end of March 2023. The rupee on Thursday hit a record low of 79.33 against the greenback on a strengthening dollar and frequent outflow of foreign funds.
According to the latest figures of the country trade deficit It touched a new record of $25.63 billion in June 2022 from $24.3 billion in May 2022. From April to June 2022, the trade deficit is $70.25 billion.
In June 2022, India’s merchandise exports stood at 37.94 billion – taking the total to $116.77 billion in Q1FY23. Meanwhile, the country’s Import increased to $63.58 billion in the month under review and cumulatively stood at $187.02 billion in the first quarter of the current fiscal.
In their Ecolog report, Yes Bank analysts Indranil Pan, Radhika Piplani and Deepti Mathew said, “Exports moderated for the third consecutive month, while imports registered marginal growth. Imports picked up due to large increase in oil and coal imports. I. The positive development was a seasonal reduction in gold imports. Despite the recent fall in global commodity prices due to rising concerns around a global slowdown, we expect oil prices to remain elevated. As such, we CAD at 2.6- / Let’s expect GDP – 3.2% of GDP, the average oil price is $100-120 a barrel.”
The Indian rupee today closed at 79.37 against the dollar in the interbank foreign exchange market. The local unit had touched a low of $79.38 per dollar during the day.
Jatin Trivedi, VP Research Analyst, LKP Securities, said, “The rupee hit fresh new low below 79.35 amid strong selling from higher levels in capital markets, indicating FIIs are still intimidated on any rise in equities. Rupee feels heat. Dollar index rises 1% with a sharp rise of $106 over previous close. Risk sentiment on inflationary pressure continues globally. Rupee ranges between 79.05-79.55 can be seen.”
NSDL data shows that FPIs continued to withdraw their money from the Indian market in July as well. So far this month, the total outflow of FPI has been 7,323 crore from the market (including equity, debt, debt-VRR and hybrid markets). Overall, in the current year, the outflow is around 2,34,613 crores.
The widening of the trade gap to a new record high raises concerns about the strength of India’s external account to withstand such increases, according to a Yes Bank report. In Q1 FY23, the trade deficit is as high as $70 billion, with an average monthly trade deficit of $23.3 billion. This is undoubtedly the highest ever in this series. A correction below this level is possible on two counts – if exports pick up or there is a sharp reduction in imports.
“With high-frequency global data on production, sales, GDP, sentiment and consumer confidence indicators already indicating the onset of a global slowdown, it is unlikely that exports will be able to offset the downtrend seen in Q1 FY23. On the other hand, India’s oil imports have remained relatively stable. As such, amid higher oil prices, the oil import bill is likely to remain high.
Also, analysts in the report pointed out that the ongoing energy crisis in India does not lead to further improvement in the situation. Coal imports have been registering new series highs with every successive print since March 2022. This trend is likely to continue further despite the increase in India’s coal production over the past 3 months.
“With the onset of monsoon season likely to impact domestic production, further increase in coal imports is plausible. Government intervention through increase in customs duty on gold from 4.24% to 15% reduction in gold imports Even though the impact is likely to be modest, given that gold prices are currently on a downside,” analysts said.
Analysts at Yes Bank said in their note that they consider 3-scenarios for India’s current account balance, with average oil prices at $100 a barrel, $110 a barrel and $120 a barrel in FY23 . The note said, “Despite the expectation of some buffer on invisible inflows, FY23 CAD is likely to exceed $93-111 billion in FY23 ($47 billion in FY22). As a % of GDP, CAD 2.6-3.2% Likely, in FY 2013. As, weakening external balance, increasing FII outflows, decline in import cover, tightening by AE, is expected to put downward pressure on USDINR.”
Therefore, “we see continuing depreciation bias in USDINR,” the report said, “our fair value model points to the 81.00 level by March 2023.”