Trade gap blowout, pricier crude oil give hope to hibernating rupee bears

Trade gap blowout, high crude price give hope to hibernating rupee bears

By Bloomberg

January 18

The blowout in India’s trade gap to its worst in three years and higher prices of crude, the nation’s biggest import item, are giving ammunition to rupee bears - many of whom have been hibernating for some time.

The rupee closed at 63.89 against the dollar on Wednesday. The domestic currency opened lower at 64.08 against Tuesday's closing level of 64.04 at the inter-bank foreign exchange. It fell to the lowest in almost three weeks early on Wednesday, despite foreign flows into India's record-breaking stock market and a weak greenback, amid worries that worsening terms of trade would be a drag on the current account deficit. That was a quick reversal for a currency that made a strong start to 2018, reaching its highest level since April 2015 just earlier this month. It rose more than six per cent in 2017, the first annual gain since 2010.

"A larger commodity bill - mainly oil - could deteriorate the trade balance anew," said Radhika Rao, an economist at DBS Bank in Singapore.

"December's numbers also rekindle concerns over the current account balance," she said. While foreign exchange reserves at a record $411 billion were enough for now, a wider current account gap, along with risks of fiscal slippages and above-target inflation, all point to a weaker macroeconomic backdrop, and could hit foreign inflows and the currency, she said, adding DBS expects the dollar to strengthen.