Axis Bank is less worried about the rupee

Pressure on the Indian rupee has eased in November as foreign portfolio investment (FPI) inflows returned and global oil prices softened, offering some relief to the currency even as India's merchandise trade deficit widened to $40 billion in October, according to a report by Axis Bank.

The bank said the widening in the goods trade deficit largely reflected seasonal trends, with half of the $10 billion month-on-month increase coming from a higher gold deficit, suggesting a delayed pickup in festive demand. The increase in gold imports, however, remained below historical trends, limiting concerns over a more persistent deterioration in the external balance.

Axis Bank said the easing in oil prices and a strong return of foreign portfolio flows had helped contain near-term pressure on the rupee. FPI inflows stood at $9.6 billion month-to-date in November, while the 12-month rolling average of forward crude oil prices had moderated to around $87 a barrel.

The improvement comes after the rupee faced pressure during the July-September quarter, when sustained outbound investments, softer net income and transfer receipts, and FPI outflows weighed on the currency. These pressures persisted despite large one-off capital flows linked to the foreign currency non-resident (FCNR) deposit scheme, the report said, citing the Reserve Bank of India's September balance of payments data.

Axis Bank expects India's current account deficit (CAD) to remain around 1% of GDP in FY27, supported by a strong surplus from services and other invisible receipts. The 12-month cumulative invisibles surplus stood at $332 billion, including a services surplus of $226 billion, helping cushion the impact of the merchandise trade gap.

The brokerage said the wider deficits typically seen in the second and third quarters of the financial year are likely to be offset by narrower gaps in the first and fourth quarters.

India's goods trade deficit widened to $40 billion in October, from around $30 billion in September. The September-October combined deficit, when annualised, stood at $391 billion, broadly in line with seasonal patterns, Axis Bank said.

Exports remained strong, growing 45% year-on-year in October, led by petroleum products, engineering goods and electronics. While higher prices supported export growth, trends in the first half of FY27 suggested that volumes in automobiles and steel had also held up.

Non-oil and non-gold imports rose 33% year-on-year, driven by electronics, machinery and edible oils, reflecting both higher prices and steady domestic demand.

The report said the increase in the gold deficit accounted for $5 billion, or half, of October's month-on-month widening in the trade gap. Oil and non-oil, non-gold deficits also increased, but only marginally.

The strong export performance and import demand point to continued economic activity, while the services surplus provides a significant buffer against the merchandise trade deficit. This, along with easing oil prices and renewed foreign investment flows, has helped improve the near-term outlook for the rupee.

Axis Bank's assessment suggests that the wider October trade gap does not, by itself, signal a structural shock to India's external accounts. Instead, the bank expects the current account deficit to remain contained, with currency pressures easing as capital flows recover and the oil import bill faces less pressure.