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India’s trade deficit biggest in five years, to worsen outlook for Indian rupee

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Weaker rupee works like a double-edged sword, is positive for exports but can add to the stress of India’s current account balance.

India’s trade deficit in July widened to the most in more than five years, worsening the outlook for the rupee that hit a record low after a Turkish lira-led sell-off in emerging-market currencies.

The trade deficit – gap between exports and imports – was $18 billion in July, fanned by a higher oil import bill, data released by India’s commerce ministry showed on Tuesday. That compares with the $15.7 billion median estimate in a Bloomberg survey of 24 economists and $16.6 billion in June.

While a weaker rupee is positive for exports, it poses an inflation risk for a nation that imports more than 80 per cent of its crude-oil needs and adds to the stress on the current-account balance. The rupee dropped to as low as 70.08 per dollar on Tuesday, keeping intact its position as Asia’s worst-performing currency this year.

Every rupee change in the exchange rate against the U.S. dollar impacts India’s crude-oil import bill by 108.8 billion rupees ($1.58 billion), according to the oil ministry.

Inbound shipments of oil in July were at $12.4 billion, up 57.4 per cent from a year ago, while gold imports surged 41 per cent to $2.96 billion and electronics goods by 26 per cent to $5.12 billion. Overall imports rose 29 per cent to $43.8 billion, while exports grew at 14 per cent to $25.8 billion.

The last time trade deficit was wider was in May 2013 at $19.1 billion, according to data compiled by Bloomberg.

India's trade deficit
India’s trade deficit in 2013-2018 period | Bloomberg

“Broader emerging-market currency movement, dollar strength, and the trend in crude-oil prices will drive the outlook for the rupee in the immediate term, which will have an impact on the landed cost of imports,” said Aditi Nayar, principal economist at ICRA Ltd. in Gurugram, near New Delhi. That will also have a bearing on various commodity prices and transmit into wholesale price inflation, she said.

Gains in wholesale prices eased for the first time in five months, Commerce Ministry data showed on Tuesday. Government data on Monday showed retail inflation quickened 4.17 per cent in July from a year earlier, slower than the 4.5 per cent median estimate in a Bloomberg survey of economists.

The monetary policy committee led by Governor Urjit Patel has increased interest rates twice since June to curb price pressures, while the central bank used foreign reserves to check currency volatility. The rupee reversed losses to close 0.1 per cent higher at 69.8963 on Tuesday in Mumbai, with traders saying state-run banks sold dollars, probably on behalf of the RBI.

The current level of reserves at about $402 billion will provide import cover of less than a year. The nation’s current-account gap has come under pressure and is expected to widen to 2.4 per cent of gross domestic product in the financial year to March 2019, from 1.9 per cent in the October-December period. – Bloomberg

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