According to economists, while the improvement in the trade balance is a positive sign, the Indian rupee is likely to remain under pressure due to capital account dynamics.
The significant drop in the deficit was driven by a steep fall in gold and silver imports and a robust year-on-year export growth of nearly 20%. Santanu Sengupta, Chief India Economist at Goldman Sachs, highlighted that beyond these factors, the diversification of shipments, particularly for labour-intensive exports like textiles and gems and jewellery to markets outside the US, was a key positive.
“The peak current account deficit is in this quarter. It will improve from the next quarter. So the current account stress particularly on the rupee, we think largely would be behind us,” Sen Gupta stated, adding that his forecast for the current account deficit (CAD) was already below 1%.
Read Here | Rupee slides to all-time low of 91 against dollar
Madhavi Arora, Chief Economist at Emkay Global Financial Services, said the strong export performance is not limited to India. Several Asian economies are seeing robust export growth, particularly led by technology shipments.
For India, sectors such as marine products, textiles, and gems and jewellery have shown resilience. Marine exports, in particular, have grown around 15%, supported by higher shipments to China. She added that exports to the rest of the world have become more resilient over the past three months, increasing India’s global market share.
Despite the encouraging trade figures, the rupee has continued to weaken, touching new lows. The experts attributed this to a confluence of factors beyond the current account.
Sen Gupta explained that the pressure comes from widening CAD in the latter half of the year, lower capital inflows, and the Reserve Bank of India running down its large short forward book.
He also argued that this is an opportune time for the currency to adjust its valuation, given that domestic inflation is low, which would limit the pass-through effect.
Regarding a potential trade deal with the US, both economists suggested it would not be a silver bullet for the rupee. Sen Gupta noted that while a deal would not resolve the short forward book issue, it would remove uncertainty for private capital expenditure and the MSME sector.
Arora cautioned that the quality of the deal matters, and it would likely only remove the penal tariff, placing India on par with its peers rather than giving it a significant competitive advantage.
Looking ahead, both experts provided a similar forecast for the rupee. They expect currency to peak at around 91, as the current account shrinks towards near-zero in the next quarter, reducing the demand for dollars.
For the entire discussion, watch the accompanying video
