In the midst of a global trade war and widening deficits, will the rupee remain immune to volatility?

By Sravya Vemuri

According to a report realised by Singapore’s banking group DBS, with widening current account deficit and breaching of the disclaimer consolidation target, inflation is expected to remain above the target rate.

CAD and fiscal deficit

India’s Current Account Deficit (CAD) in the October–December period widened to 2.0 percent of the GDP, up from 1.4 percent in the year-ago period. This was attributed to higher trade deficit brought about by a larger increase in imports relative to exports, according to the Reserve Bank of India (RBI). Current account deficit is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of goods and services it exports. This represents a country’s foreign transactions and is a part of the country’s balance of payments.

Fiscal consolidation in the country is also seeing a backlash, as the recent World Economic Outlook report estimated that India’s fiscal deficit might go up by 0.3 points of the GDP in 2017-18. Amidst such weak macroeconomic indicators pairing with the trade war situation, Indian exports might take a big hit. Such tariff wars come at a time when the world economy is just about getting out of a slow growth phase. If the global trade volume shrinks on account of this trade war, India’s exports are bound to be buffeted.

Currency volatility

Experts had also warned about the currency volatility, which generally follows trade battles. India’s exports have been on a growth streak over the past one year, owing to a pick-up the global demand. The currency volatility is bound to return, considering that trade battles have historically affected currency markets significantly.

The rupee has been relatively stable over the past year and is expected to strengthen in the long term as investors continue to pump money into the economy. Investor confidence in India meant that rupee ended at 65.01 to the dollar, a day after the Trump administration in the US imposed higher tariffs on China. The rupee had gained on Thursday after the US Federal Reserve raised its policy rates significantly. India can play a significant role in guiding the exercise of bringing the two nations on board. The stakes are high for Indian companies with businesses in both the countries. The US is India’s largest export destination, with $42.2 billion of shipments sent there in 2016-17. In the same year, China was the largest source of Indian imports. India’s $51 billion of trade deficit with China might also rise as Chinese producers search for other reliable markers too.

Effect on the rupee and other South Asian currencies

Most of the South Asian currencies have already softened due to the tariffs imposed by the US on the steel and aluminium products. Whether India can be immune to such circumstances is a larger question that attracts different answers filled with intricacies. Bearing in mind the multiple effects that Indian economy would have because of the trade war-kind situation, it is high time India took a step to bring USA and China at parleys.