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Rupee likely to hit 81 against dollar by FY23-end, here's why

According to Yes Bank's report, the widening of the trade gap to fresh record highs only increases the concern around the strength of India’s external account to withstand such increases.Premium
According to Yes Bank's report, the widening of the trade gap to fresh record highs only increases the concern around the strength of India’s external account to withstand such increases.

  • As per the latest data, the country's trade deficit touched a fresh record of $25.63 billion in June 2022 widening from $24.3 billion in May 2022. From April to June 2022, the trade deficit stands at $70.25 billion.

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The widening of trade deficit to fresh record highs has made a case for further depreciation of the Indian rupee against the dollar. The local currency is seen to reach up to 81 by March 2023 end. On Thursday, the rupee hit a record low of 79.33 against the greenback due to a strong dollar and stubborn foreign funds outflow.

As per the latest data, the country's trade deficit touched a fresh record of $25.63 billion in June 2022 widening from $24.3 billion in May 2022. From April to June 2022, the trade deficit stands at $70.25 billion.

In June 2022, India's merchandise exports stood at 37.94 billion - taking the total to $116.77 billion in Q1FY23. Meanwhile, the country's imports climbed to $63.58 billion in the month under review and cumulatively stood at $187.02 billion in Q1 of the current fiscal.

Analysts Indranil Pan, Radhika Piplani, and Deepthi Mathew at Yes Bank in their Ecologue report said, "exports moderated for the 3rd consecutive month whereas imports registered a tepid uptick. The uptick in imports was on account of a large increase in oil and coal imports. The positive development was the seasonal moderation in gold imports. Despite the recent pullback in global commodity prices due to increasing concerns around global slowdown, we expect oil prices to remain sticky at higher levels. As such, we expect CAD/GDP at 2.6-3.2% of GDP with oil price averaging at $100-120 per barrel."

At the interbank forex market today, the Indian rupee settled at 79.37 against the dollar. The local unit had touched a lifetime low of 79.38 per dollar during the day.

Jateen Trivedi, VP Research Analyst at LKP Securities said, "Rupee scaled to fresh new lows below 79.35 falling by more than 0.50% amid strong sell off from higher levels in capital markets indicting FII’s still fearful on any rise in equities. Rupee felt the heat with dollar index sharp surge towards 106$ rising 1% compared to last close. As risk sentiment on inflationary pressures continues globally. Rupee range can be seen between 79.05-79.55."

NSDL data showed that FPIs continued to remove their money from the Indian market even in July. So far this month, FPIs' overall outflow stood at 7,323 crore from the market (including equity, debt, debt-VRR, and hybrid market). Overall, in the current year, the outflow is around 2,34,613 crore.

According to Yes Bank's report, the widening of the trade gap to fresh record highs only increases the concern around the strength of India’s external account to withstand such increases. In Q1 FY23, the trade deficit sums to $70 billion, recording an average monthly trade deficit of $23.3 billion. This undoubtedly is the highest in the series so far. A correction below this level is possible on two accounts - if exports pick up or imports reduce substantially.

"With high-frequency global data on production, sales, GDP, sentiment, and consumer confidence indicators already indicating start of global slowdown, it is unlikely that the exports will register stellar growth to offset the downtrend seen in Q1 FY23. On the other hand, India’s oil imports remain relatively inelastic. As such, amid higher oil prices, oil import bill is likely to remain elevated," the report said further.

Also, the analysts in the report pointed out that the ongoing energy crisis in India does not improve the situation any further. Coal imports are recording fresh series high with each successive print since March 2022. This trend is likely to continue further despite increases in India’s coal production over the last 3-months.

"The start of monsoon season is likely to impact domestic production going forward hence further increase in coal imports is plausible. The government intervention through increase in customs duty on gold by a net 4.24% to 15% could reduce gold imports even as the impact is likely to be marginal, given that gold prices are currently on a downward bias," the analysts note said.

Yes Bank's analysts in their note stated that they consider 3-scenarios for India’s current account balance with average oil prices at $100 per barrel, $110 per barrel, and $120 per barrel in FY23. The note added, "Despite some buffer being expected on the invisible inflows, FY23 CAD is likely to be higher at $93-111 bn in FY23 ($47 bn in FY22). As a % of GDP, CAD is likely at 2.6-3.2% in FY23. As such, weakening external balances, increase in FII outflows, decline in import cover, tightening by AEs, is expected to build downward pressure on USDINR."

Hence, the report said, "we see depreciation bias in USDINR continuing," adding "Our fair price model indicates for an 81.00 level by March 2023."

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