A weakening rupee will help suppliers of services more than those of goods, given that import-sensitive merchandise export segments, including petroleum, gems & jewellery and even electronics, will face upward pressure on input costs. Many services segments, however, barely rely on imported inputs.
Moreover, a demand slowdown in top markets such the US and the EU will weigh more on the order flow in goods than in services. Also, the currencies of some of India’s competitors in the goods export market (such as Malaysia, South Korea and Bangladesh) have depreciated at a sharper pace against the dollar than the rupee this year. So, gains to the goods exports from the rupee depreciation will only be limited, trade sources and economists told FE.
According to Services Export Promotion Council (SEPC) chairman Sunil Talati, services exports are expected to jump 18% on year in FY23 to a fresh peak of $300 billion.
Importantly, just when it was assumed that the current account deficit (CAD) will improve in the third quarter with the easing of global crude oil prices and imports may ease once the current revenge spending spree is over, the depreciating rupee stokes fresh concerns about inflated import bill and consequent pressure on the trade deficit and the CAD.
The weak rupee will also drive up the costs of external borrowing as well as hedging for domestic firms. Of course, as some analysts have argued, limited amount of rupee depreciation is required for India to retain export competitiveness.
Bank of Baroda chief economist Madan Sabnavis said, “Export advantage will all depend on how other currencies fare. The rupee fall has been driven mainly by the dollar strengthening further, and hence, other currencies too have taken a hit. So, there may be less advantage (for India) here. “The CAD will widen and the extent of its increase will depend on how much the rupee falls, he added.
The external borrowing of firms will also become less attractive, with rates going up and the rupee falling. “They may turn to domestic sources,” Sabnavis added.
Dharmakirti Joshi, chief economist at Crisil, said, “Weakening of the rupee does not help exports much, where global demand plays a dominant role. With global slowdown, exports are taking a hit, while imports are sticky in nature. As a result, trade deficit and the CAD will go up.” Joshi expected the CAD to more than double to 3% of GDP in FY23.
Icra chief economist Aditi Nayar said the CAD for FY23 will likely widen to an all-time high of $120 billion (3.5% of GDP) in FY2023 from $38.7 billion (1.2% of GDP) in FY22. “Nevertheless, as a proportion of GDP, it is expected to be much lower than the levels seen in FY13 (4.8% of GDP),” she added.
Aurodeep Nandi, India economist at Nomura, said, “While weak currency should help exports, it is important to juxtapose it on the current paradigm of slowing global growth, which is likely to have a more pronounced negative impact on exports in the months to come. We estimate current account deficit at 3.8% of GDP in FY23.”
Yes Bank chief economist Indranil Pan said FPI inflows could remain a challenge, “as global risk aversion remains high and the interest rate differential between India and the US has shrunk”. “Domestic companies may not remain averse to raising money through ECBs with interest rates in the advance economies moving higher, and (due to) the uncertainties with respect to the relative currency values,” he added.
DK Pant, chief economist at India Ratings, said that in exports, global demand and the currency movement of India’s competitors are major determining factors.
“Weakness in global demand originating from weak economic conditions in the developed world is impacting our exports,” he said. Pant expected current account deficit at 3.4% of GDP in FY23.