Rupee Depreciation: Nomura flags rising current account deficit, says rupee could sink to 82 against dollar

The current account deficit could widen further to 3.3% in FY23 from 1.2% in the previous fiscal amid concerns over its impact on an already depreciating rupee, Nomura said in a report.

The rupee could sink to a level of 82 against the dollar by third quarter of 2022 amid fears of FPIs accelerating their exit from emerging economies in the backdrop of Fed aggressively tightening rates to rein in a runaway inflation.

The rupee touched a new record low and closed at 79.36 against the dollar on Tuesday.

India recorded a current account deficit of 1.2 per cent in FY22. Latest trade deficit data shows that exports growth moderated in June while imports remained elevated driven mainly by oil, gold and coal.

The rise in imports led to trade deficit reaching a record of $25.6 billion in June. Higher trade deficit leads to an expansion of the current account deficit.

Nomura said that the latest measures taken by the government on curbing gold imports by raising the import tax to 15% and export tax on petroleum products may not help in reining in the widening trade gap.

“Gold import demand is less sensitive to higher taxes, while export taxes could moderate oil exports,” it said.

The report stated that the impending recession in US could slow down India’s exports and put more pressure on the CAD.

Aggressive tightening of rates by the US will make the dollar stronger.

“Aggressive Fed tightening could also result in a US recession by Q4 2022, in our view, and such an environment is not conducive for EM/Asia FX that are dependent on healthy global growth and equity-related inflows, including INR,” the report stated.