Indian rupees appreciation making matters worse for trade deficit with China

Key Highlights:

• Rupee trades at 63-level against US dollar presently
• Indian Rupee appreciates by nearly 7% against dollar
• USD has depreciated by 9% since start of 2017

The Indian rupee is now at its two year-high and is trading at nearly 63-level against US dollar. Rupee has appreciated by nearly 7% against dollar and has outperformed emerging markets currencies since the start of the year 2017.

Three reasons are the outcome of rupee appreciation – firstly under-performance of dollar index which has depreciated by 9% in 2017, secondly Chinese forex reserves has been rising for the sixth consecutive month and climbed to $3.08 trillion in July and lastly strong foreign inflows India.

Data compiled by NSDL showed FPI's invested a total of Rs 179,802 crore between January 2017 – till date. Among which Rs 121,939 crore was invest in debt and Rs 57,863 crore in equity.

However, the impact of rupee appreciation has been deeply seen in India's balance of trade since the start of 2017.

Balance of Trade is the difference between a country's imports and exports. When imports are higher than exports it results in trade deficit for a country or a vice versa.

Gaurav Dua, Head of Research, Sharekhan said, "Appreciation of the rupee adversely impacts the export driven businesses like IT services, textiles & garments, gems & jewelry and pharmaceuticals. On the other hand, the importers tend to benefit from appreciation of the rupee against the dollar."

Exports in June 2017 stood at $23.56 billion, rising by just 4.39% compared to $21.68 billion in the corresponding period of the previous year. On month-on-month basis June exports has declined versus $ 24.01 billion in May 2017 and $ 24.63 billion in April 2017.

At the same time, imports grew by 19% to $36.52 billion in June month compared to $29.45 billion a year ago same period. Imports in May stood at $37.85 billion and $37.88 billion in April 2017.

According to State Bank of India, Indian currency has also appreciated by 3.7% against Chinese Renminbi during the same period. With trade deficit with China constituting 48% of the overall trade deficit in FY17, this is indeed a matter of serious concern for policy makers.

RBI's August monetary policy sends rupee to a two-year high