Record Trade Deficit Pushes Rupee to New Low

The Indian rupee is poised to hit an all-time low on Tuesday, as a record-breaking trade deficit adds to existing pressures on the currency, reports Reuters.

The one-month non-deliverable forward indicates the rupee will open at 84.88-84.90 to the US dollar, exceeding the previous all-time low of 84.88 reached last Thursday.

This comes after India's merchandise trade deficit surged to a record high in November, driven by a surge in gold imports and weak exports.

"The trade deficit data 'reinforces the ongoing view' that the rupee will continue to weaken at a moderate pace," a currency trader at a bank told Reuters. "The obvious level to watch next is 85, a move past which is likely to push more hedging activity."

The November trade deficit ballooned to $37.84 billion, significantly higher than the previous month's $27.14 billion and exceeding economists' forecasts of $23.9 billion.

While the surge in gold imports is unlikely to sustain, the weakness in merchandise exports is likely to persist, according to Nomura. This is attributed to anticipated trade tensions under President-elect Donald Trump's policies.

Expectations of new tariffs under Trump's administration have already spurred a rally in the dollar, further pressuring the rupee and other Asian currencies.

Compounding these challenges, India's slowing economic growth is expected to dampen capital flows, with foreign investors likely to be net sellers of Indian equities this quarter.

The Federal Reserve's two-day policy meeting, concluding on Wednesday, is unlikely to offer much respite to the rupee. While a 25-basis-point rate cut is fully priced in, the overall tightening cycle in the US is expected to continue to strengthen the dollar relative to emerging market currencies like the rupee.