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Indian rupee hits record low on current account deficit concerns

Indian rupee hits record low on current account deficit concerns

The Indian rupee hit a record low against the US dollar on Tuesday as concerns of a wider current account deficit came to the forefront after the country’s trade deficit hit an all-time high in June, Reuters reported.

Data late on Monday showed India’s June trade deficit widened to a record high of $25.63 billion, following a rise in crude oil and coal imports, from $9.61 billion a year earlier.

Analysts and economists are expecting the country’s current account deficit to widen to around 3.2% of the GDP in fiscal year 2023 compared with 1.2% in 2022.

The partially convertible rupee closed trading at 79.37/38 per dollar, after hitting a life low of 79.3750. It had touched the previous record low of 79.12 last week and had closed trading at 78.95 on Monday.

“We expect India’s widening current account deficit to remain an ongoing drag for INR, with limited offsets from India’s FDI and overseas investment inflows, exacerbated by ongoing FPI outflows,” Sonal Varma, economist at Nomura, said.

“Therefore, we expect USD/INR to reach 82 by Q3 2022 and 81 by Q4 2022. One risk to our view is the RBI’s USD selling intervention, which could slow the pace of INR depreciation.”

The domestic share market turned negative towards the end of trade to close down 0.2%, adding to the pressure on the rupee, according to Reuters.

Foreign portfolio outflows from equities in the month of June stood at $6.6 billion, the highest since March 2020, taking the total outflows so far in 2022 to over $30 billion.

Traders said the central bank sold dollars sporadically and helped stem a steeper fall in the local unit, but expectations of aggressive rate hikes by the US Federal Reserve and the resultant wider interest rate differential is expected to keep the weakening bias in the rupee.

Goldman Sachs in a recent note said given the changes in the brokerage’s balance of payments forecast, they have revised their 3, 6 and 12 month forecasts on the USD/INR to 80, 81 and 81 compared with 79, 79 and 78 previously, Reuters reported.