USD/INR Flat Amid IMF Downgrade, Growing Trade Deficit

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The Indian rupee is struggling for direction to kick off the trading week as investors try to gauge the the currency’s direction following some critical data. With the International Monetary Fund (IMF) slapping a downgrade on the emerging market, there are many questions being asked about the short- and medium-term future of one of the world’s largest economies. Can the rupee find a permanent direction after a month of stagnation?

According to the Ministry of Commerce and Industry, India posted a trade deficit of $11.23 billion in July, the third consecutive monthly increase. Imports climbed 10.81% last month to $46.4 billion, while exports advanced 8.21% to $35.17 billion.

India’s manufacturing sector is booming. The IHS Markit manufacturing purchasing managers’ index (PMI) rose to 55.3 in July, up from 48.1 in June. The market had forecast a reading of 50.5 – anything above 50 indicates expansion.

The composite and services PMI numbers will be released on Wednesday.

Last week, financial data highlighted that deposit growth rose 10.7% year-over-year in the week ending July 16, while bank loan growth jumped 6.5%. Foreign exchange reserves slipped to $611.15 billion in the week ending July 23. Infrastructure output eased to an annualized rate of 8.9% in June.

On Friday, the Reserve Bank of India (RBI) will be holding its August policy meeting, where it is expected to leave the benchmark interest rates unchanged at 4%.

Meanwhile, policymakers are slamming the IMF’s downgrade in its outlook, lowering it from 12.5% in April to 9.5% for the fiscal year ending March 2022. The group cited a severe second wave of the coronavirus outbreak and an “expected slow recovery in confidence from that setback.”

However, India’s chief economic advisor Krishnamurthy Subramanian disagreed, telling CNBC that the IMF was “significantly off the mark.”

“Our projections were not as high as theirs, nor do we think that the revision is warranted,” he said.

Inflation is another big issue in the developing economy, with most officials anticipating that price inflation will be in the range of 5% and 6% for many months to come. This could be horrific news for a country on the rebound since rising inflation forces central banks to curtail their stimulus and relief measures.

The USD/INR currency pair fell 0.02% to 74.3648, from an opening of 74.3794, at 13:44 GMT on Monday. The EUR/INR rose 0.09% to 88.36, from an opening of 88.29.

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