India’s current account deficit likely to jump at near-decade high

India’s current account deficit likely widened to its highest in nearly a decade in the April-June quarter, driven by soaring global commodity prices and the biggest capital outflows since the global financial crisis of 2008, a Reuters poll found.

With the Indian rupee near a record low around 80 to the US dollar and a worsening trade gap, worries over the size of the current account shortfall for Asia’s third largest economy, gnawing at investor confidence for months, are set to intensify.

The median forecast in a Sept. 9-15 Reuters poll of 18 economists showed India’s current account deficit last quarter was $30.5 billion, or 3.6% of gross domestic product, the widest in nine years.

Forecasts ranged between $28.5-$34.0 billion or 2.4%-5.0% of GDP. For the Jan-March quarter, the deficit was less than half that size at $13.4 billion, about 1.5% of GDP.

“A near decade-high current account deficit last quarter transpired in an environment where the trade imbalance almost hit a new high every month and the rupee sunk to new record lows every week,” said Vivek Kumar, an economist at QuantEco Research.

“Pressures for funding the current account deficit are already being felt in the currency, and in an environment where most global central banks are tightening and the RBI’s currency reserves are declining, those pressures are likely to intensify.”

While the rupee has depreciated around 7% against the greenback since January 2022, it had lost around 20% during the taper tantrum crisis of 2013 when the US Federal Reserve suddenly cut its government bond purchases.

Even as New Delhi responded to a widening trade gap by raising import duty on gold at the end of June, the full extent of that measure will only show this quarter.

With the Indian rupee expected to trade around its lifetime lows against the dollar into next year and prices of crude oil due to stay elevated, the current account shortfall is set to remain near a decade high until the end of this fiscal year.

Indian rupee: The Indian rupee marked its worst week in five on Friday, as risk sentiment was hit by the Chinese yuan weakening past 7 per dollar to breach a key psychological level for the first time in two years.

The partially convertible rupee closed down 0.1% at 79.74 per dollar, recouping some of the day’s losses when it had hit an over one-week low. For the week, the rupee declined 0.2%, its biggest loss since the week ended Aug 12.

A foreign exchange trader said market participants were wary that the rupee had not been allowed to weaken past 80 per dollar and saw it as a level to protect.

Traders were likely unwinding long dollar positions and creating fresh shorts, he added.

Asia’s economic engine China saw its yuan fall to 7.0166 due to a buoyant dollar and a slowing domestic economy, which had a cascading effect on its regional peers due to their close trade relationship.

A slew of data from China came in mixed, as industrial output beat forecasts but property investment continued to decline considerably.

Several Asian currencies hit multi-year lows, while stocks sold off. Indian equities plummeted 2%.

Meanwhile, unexpectedly strong US data overnight added to the case that the economy could tolerate higher interest rates, sparking a sell-off in Treasuries and making the greenback even more attractive to hold.

The dollar index rallied 0.4% to 110.13, not far from its two-decade high of 110.79 reached earlier this month.

Traders now shift their focus to a slew of monetary policy meetings by the Federal Reserve, the Bank of Japan, and the Bank of England next week, with the Fed meeting taking centre stage. (Reporting by Anushka Trivedi in Mumbai; Editing by Neha Arora)

Indian government bonds see their worst week in over three months, as traders turn cautious with rate hike fears gripping the market, and lack of any development on the much-anticipated inclusion of local bonds in global indexes.

The benchmark Indian 10-year government bond yield ended at 7.2660%, after closing at 7.2386% on Thursday. The yield rose 10 basis points this week, the biggest such move since week ended Jun. 3.

The 10-year 7.26% 2032 bond yield ended at 7.2310%, after closing at 7.1997% on Thursday. The yield on this paper which will replace the existing benchmark soon jumped 12 bps this week.

“With the inflation prints, it is very clear that repo rate will be raised to at least 6%, and even more after December,” said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.

The recent rise in yields follows a drop in the past three weeks led by strong bets of an imminent addition of Indian debt to global indexes.