India's Widening Trade Deficit
India's merchandise trade deficit significantly widened to $40 billion in October 2026, marking a $10 billion increase from the previous month. This sharp rise has naturally fueled apprehension regarding potential downward pressure on the Indian rupee.
According to a report by Axis Bank Research dated November 13, approximately $5 billion of this monthly increase, or half, was attributed to higher gold imports. This surge in gold purchases was linked to a delayed pick-up in festive demand, though overall gold import volumes remained below historical seasonal trends. Both oil and non-oil, non-gold trade deficits also saw an expansion during the period.
Axis Bank's Reassuring Outlook
Despite the concerning trade figures, Axis Bank Research believes the deterioration is largely seasonal and unlikely, on its own, to trigger sustained pressure on the Indian rupee. The bank forecasts India's current account deficit (CAD) to remain contained at roughly 1% of GDP for the fiscal year 2027.
Key Factors Supporting the Rupee
- Robust Services Surplus: India's strong services trade surplus, which stood at an impressive $226 billion on a trailing 12-month basis, provides a significant buffer. Including net transfers, the broader invisibles surplus reached about $332 billion, cushioning the merchandise trade gap.
- Returning Foreign Investments: The rupee has recently benefited from improving foreign portfolio investment (FPI) flows. Foreign investors had purchased nearly $6 billion worth of Indian equities by early November, supporting demand for the domestic currency.
- Easing Oil Prices: International oil prices have shown signs of easing, which helps reduce pressure on India's external finances by lowering import bills.
Rupee Volatility and Future Risks
The Indian rupee has experienced mixed movements. On November 11, it appreciated by 0.26% to close at 93.69 against the dollar, its strongest level since April and the second-best performing major Asian currency that day. However, the recovery proved uneven, with the rupee weakening to 94.24 per dollar by November 13 due to a stronger dollar and renewed crude oil pressures.
Axis Bank noted that while foreign portfolio flows returned strongly in early November and easing oil prices helped, risks persist. Stronger US inflation and expectations of further Federal Reserve tightening could strengthen the dollar globally, potentially weighing on emerging-market currencies like the rupee. The balance between foreign capital inflows, global crude prices, and dollar movements will remain critical for the rupee's near-term trajectory.