Uncertainty in the global economy, prompted by the spread of the fallout from the subprime mortgage crisis in the US, is also impacting the Indian economy. While there were record inflows of foreign capital in the current year, it is not certain that this will be sustained.
At the same time, the increased inflows have led to an appreciation of the rupee against the dollar and in the process squeezed export earnings. The flip side of this trend, however, is that it has made imports cheaper—partially mitigating the impact of the record rise in international crude prices.
Based on the trends in the first six months of the current fiscal year, the trade deficit is poised to further widen. The exact extent of this increase, however, will depend on whether international prices of commodities, such as petroleum and foodgrains, increase further.