Indian rupee heads for new lows this year as trade deficit widens

Elevated commodity prices are bearing down on the currency

After months of wild volatility in the rupee, India’s widening trade deficit and elevated commodity prices are bearing down on the currency, reinforcing a recent downward bias and pushing it towards a new low for the year.

That is the view of traders who have seen the rupee whipsaw from being Asia’s best performer in the first quarter to its worst in April when another wave of Covid-19 infections took hold.

This volatility and the prospect of tapering by the US Federal Reserve have also reduced the attractiveness of India’s currency for carry trades, adding to the headwinds it is facing.

“We expect oil and broader commodity complex prices to remain elevated in the short term, which will weigh on India’s trade balance,” said Parul Sinha, head of Indian financial markets and macro trading for South Asia at Standard Chartered.

“We maintain a bearish view on the rupee.”

Standard Chartered and RBL Bank forecast that the currency will depreciate to 76 rupees per US dollar by the end of the year while their peers at Deutsche Bank have a slightly less pessimistic projection of 75.

The rupee was trading at 74.4563 to the dollar on Monday while Brent crude, the benchmark for India’s oil imports, was above $75 a barrel, up more than 45 per cent since the start of the year.

Amid the devastating human toll that the coronavirus is taking in India, the rate of increase in new infections is slowing, which is improving the prospects for reopening the economy.

But as the Covid curve flattens and consumers and businesses become more active, demand for imports is also set to increase, weighing on the currency.

Updated trade data due on Thursday is expected to confirm that the deficit widened to $9.4 billion in June, from $6.3bn in May. Kotak Mahindra Bank estimates that billion dollar deficits will continue and average in the “double digits” as the economy reopens.

Technical indicators also point to further depreciation of the currency given that the dollar-rupee’s moving average convergence-divergence gauge, a measure of momentum, remains above zero in bullish territory.

The pair has room to run before reaching resistance at April’s peak of 75.3362.

RBL Bank’s domestic markets head Anand Bagri, who expects the rupee to weaken, sees pockets of support for the currency, including inflows for equity offerings.

Notable among these is a $1.3bn initial share sale from Zomato and Paytm’s bid for shareholder approval of a $2.2bn stock sale that would set in motion the process for the country’s largest market debut.

The Reserve Bank of India also has currency reserves worth $600bn to draw on to curb any sharp fall in the rupee.

‘”We expect the RBI to remain proactive with its FX intervention strategy to ensure limited volatility in the rupee and to prevent excessive rupee depreciation from feeding into inflation,” said Kaushik Das, chief India economist at Deutsche Bank.

Updated: July 12th 2021, 6:47 AM