Rupee at 80: Little relief on the cards from high trade deficit

Due to global risk aversion on the back of geo-political tensions and aggressive policy tightening by the Fed, the dollar has appreciated against most currencies, including the rupee.

A depreciating rupee, which briefly hit 80 to the dollar on Tuesday, may boost India’s exports but price-inelastic imports of crude oil and gold would mean limited relief on the trade deficit, which clocked a record $26.2 billion in June.

Due to global risk aversion on the back of geo-political tensions and aggressive policy tightening by the Fed, the dollar has appreciated against most currencies, including the rupee.

And, with other currencies depreciating, India’s comparative advantage in this respect may be limited.

“The weakening of the rupee is good from a trade balance perspective because it promotes exports and discourages imports.

"But that impact is likely to be very mild because exports depend on global demand, which is slowing, and imports are rigid.

"The trade imbalance correction impact is very limited unless the currency depreciates very sharply,” CRISIL Chief Economist D K Joshi said.

The Monthly Economic Report, which the finance ministry brings out and was released earlier this month, said the depreciation, in addition to elevated global commodity prices, had made price-inelastic imports costlier, making it further difficult to reduce the current account deficit.

“The deterioration of CAD could, however, be moderate with an increase in service exports in which India is more globally competitive as compared to merchandise exports,” it added.

Pronab Sen, former chief statistician of India, said normally a depreciating rupee would improve “our trade deficit”, because imports would come down.

“But now imports are not coming down because of internal income distribution problems, and exports are going to be adversely impacted, because the rupee has appreciated against most other currencies such as the euro, pound and yen,” he said.

Madan Sabnavis, chief economist at Bank of Baroda, said a continued fall in the rupee would put pressure on imports, resulting in the trade deficit widening.

"A fall in commodity prices may offset the impact of currency depreciation, but only to a certain extent,” he added.

Sabnavis said as far as gold imports were concerned, imports might continue to rise irrespective of a hike in import duty imposed by the government, considering the consumer sentiment associated with the purchase of the commodity.

India raised its basic import duty on gold to 15 per cent from 10.75 per cent earlier this month, seeking to reduce demand.

The country is the world’s second-biggest consumer of the precious metal.

A downward trend in the equity market owing to recessionary fears and the outflow of portfolio investment have dampened investor sentiment, raising demand for gold, which is considered a safe investment option.

“We are seeing a large trade deficit at this point of time because Indian industry is witnessing challenges in inventory management due to the global supply chain disruption.

"This has pushed up imports in the last few months. However, the trend is unlikely to continue.

Once inventories are managed well, the demand for imported products will go down,” said Ajai Sahai, director-general and chief executive officer, Federation of Indian Export Organisations.