Rupee seen higher on current account deficit surprise and dollar retreat

The Indian rupee is expected to open higher against the US dollar on Friday, after the country reported a lower-than-expected current account deficit for the June quarter.

The dollar index pulling back further from multi-year highs will likely be an additional boost for the rupee, traders said, reports Reuters.

The rupee is likely to open around 81.65-81.70 per dollar, up from 81.86 in the previous session.

India posted a CAD of $23.9 billion in the April-June period, wider than $13.4 billion in the preceding quarter but lower than $30.5 billion that economists were expecting.

In terms of percentage of the GDP, the CAD widened to 2.8 per cent, the highest in four years. A Reuters’ poll of 18 economists was expecting CAD of 3.6 per cent of the GDP.

“A slightly larger services surplus, and remittances, ensured the deficit did not widen dramatically,” said Rahul Bajoria, chief India economist at Barclays Bank.

Bajoria expects the CAD to remain elevated in the coming quarters, thanks to the revival in domestic demand and the ongoing impact of elevated commodity prices.

Traders await the Reserve Bank of India’s policy decision at 1000 IST (0430 GMT). The surging Treasury yields and the resultant pressure on the rupee are likely to prompt the RBI reason to deliver a 50-basis-point rate hike. 

“In the context how quickly the rupee has fallen over the last few days, we think it is almost certain the RBI will deliver a 50 basis point hike and a hawkish commentary,” a trader at a Mumbai-based bank said.

FTSE Russel said India will be retained on its watch list for a potential upgrade to Market Accessibility Level ‘1’ and for consideration for inclusion in the FTSE Emerging Markets Government Bond Index (EMGBI).