Rupee Surges as India’s Trade Deficit Narrows

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Sept. 11 – Recent government data has shown that India’s trade deficit narrowed to US$10.92 billion in August (from US$12.27 billion in the previous month) due to higher exports and lower imports. In August, exports increased 12.97 percent to US$26.13 billion, the second straight month of double digit growth, while imports decreased 0.68 percent to US$37.05 billion. According to India’s Commerce and Industry Minister Anand Sharma, a prominent cause of the narrowed trade deficit was the ongoing decline in gold imports.

“Gold imports have come down… It is coming down,” said Sharma. “Exports are on a firm, positive terrain now. I remain optimistic about exports being in positive territory,” he further added.

Gold imports in August fell to just US$650 million, down from US$2.20 billion in July. This was largely a result of the recent steps taken by the Indian government and the central bank to control demand for the precious metal in the world’s largest consumer market for gold. The government had previously increased the import tax on gold, while the central bank reduced the ability of bullion dealers to make speculative purchases (among other steps).

“We expect India’s trade deficit to remain on a moderating trend on the back of weaker [economic] growth and import restrictions on gold,” said economists Rahul Bajoria and Siddhartha Sanyal. “We think the RBI’s initiatives could attract up to US$10 billion of foreign-exchange inflows in the next three months and be supportive for the rupee.”

Partly due to the shrinking trade deficit, Indian stocks and the rupee have subsequently surged. The rupee had previously depreciated 16 percent to the U.S. dollar since May, while Indian stocks fell 12 percent from this year’s high. On Tuesday, however, the rupee had appreciated 6 percent over the previous four trading sessions.

Furthermore, India’s benchmark stock index jumped by 3.8 percent, or 727.04 points, to 19997.10 points. Building on this, all 13 sector-based indexes of India’s stock exchange ended higher.

India’s trade gap, the driver behind its growing current-account deficit, as well as its depreciating rupee, has been a great cause for concern among investors in the past few months. The recent gains however, including the ongoing policies of the central government and the appointment of Raghuram Rajan as the new head of the Reserve Bank of India, are now injecting much-needed optimism back into the Indian market.

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