Rupee under pressure, as trade deficit widens

Indian rupee was trading under pressure at 67.80 with respect to dollar in today’s forex markets owing to November's  trade data, which was released late evening on Thursday, December 15, 2016. Trade deficit has widened to its two-year high in the month of November.

The main reason behind the widening trade deficit has been negligible export growth and an increasing import in the previous months. One of the most important factor leading to an increase in the imports has been related to gold and oil.

In relative terms demand for oil has not increased, however, as the prices have been rising for the past quarter or so it has led to inflated import bill vis-à-vis oil imports. On the other hand, gold demand has increased consecutively for two straight months owing to festive demand and the onset of marriage season in the country. Low gold prices internationally have also led to increase in demand for the yellow metal.

Exports have painted a dull picture due to the weak global demand environment for Indian made products, thereby, increasing the deficit and consequently putting pressure on the Indian rupee as country must spend more dollars to import, whereas it earns less foreign currency.

Increasing deficit amount can be a gruesome situation for both the government and RBI, given the troubles economy is facing post demonetisation.