Widening trade deficit, high oil prices: Why the rupee is at a seven-month low against the US dollar

The Indian currency is weakening steadily, and the outlook isn’t rosy.

The rupee has lost nearly 3% of its value since the start of 2018, and it is the second-biggest loser in the BRICS group: Brazil, Russia, India, China, and South Africa. The Russian ruble is the only currency that has lost more value than the rupee in 2018 so far.

“The fall in Indian rupee can be attributed to higher crude oil prices, widening trade deficit, and higher capital outflows,” Prathamesh Mallya, an analyst at Angel Commodities Broking, said in a report on April 17.

Wider trade deficit

India’s import bill is rising at a time when exports’ contribution to the country’s GDP has hit a 14-year low. That has increased the trade deficit, the amount by which a country’s import value exceeds its net exports, by up to $156.8 billion for financial year 2018, compared to $105.72 billion in the previous year.

The expansion in merchandise imports in India was nearly twice that of export growth in the year ended March 2018, Aditi Nayar, economist at ratings agency ICRA, told BloombergQuint on April 13.

This trend of rising imports, and slow exports, she added, may push up the current account deficit, the sum of all transactions between a nation and its global trading partners, to nearly 1.9% of the gross domestic product in financial year 2019.

This essentially means India will spend substantially more dollars buying stuff from other countries than it earns from selling goods and services across borders, leading to a weaker rupee.

The oil slick

India spends more money on importing crude oil than anything else. Nearly 80% of the country’s fuel needs are met by imported crude oil.

And the daily fuel demand is expected to more than double to 190,000 barrels in 2018, up from last year’s 93,000 barrels, according to a January report from energy research and consultancy firm Wood Mackenzie.

While demand for crude oil is rising, so is the cost. The Indian crude basket, the weighted average price of all the country’s crude oil imports, has gone up from $52.49 in April last year to over $63 in March 2018, a rise of 22% in a year, according to government data.

This rise in crude oil prices will strain finances. Every $10 rise in the crude oil price widens India’s fiscal deficit by 0.1% of the GDP, according to a January report by global broking firm Nomura.

Again, India will need more dollars to meet the rising demand and meet the cost of crude oil – the expected stress has dented the rupee. The weaker rupee, in turn, will increase the cost of imports further.

Capital outflows

The vicious cycle of the dollar deficit and weakening rupee can be offset if other sections of the economy earn additional dollars. For instance, the capital markets.

However, foreign investment in Indian equities and bonds has slowed down, too.

In the last three months, foreign portfolio investments stood at Rs 13,260 crore, a fifth of the figure at the same time last year, data from National Securities Depository Limited show.

Catch-22

Even as external factors have shaken Indian authorities out of their comfort zone, the Reserve Bank of India can take heart from its record pile of dollars to support the rupee in rainy days such as these. India’s forex reserves hit an all-time high of $424.8 billion in the week ended April 6, RBI data shows.

However, India’s ballooning dollar reserves have incurred the wrath of the Donald Trump administration.

The US suspects currency manipulation by India after “net annual purchases of foreign exchange reached $56 billion in 2017, equivalent to 2.2% of GDP,” according to the United States Trade Representative. This has put India on a watch list alongside China, Mexico, and Japan.

All taken together, the rupee is likely to further slide to the 66.2 mark against the dollar in the near term, according to Angel Broking’s Mallya.

This article first appeared on Quartz.