India's $40 billion trade deficit raises concerns, but Axis Bank sees limited pressure on rupee. Here's why

India's merchandise trade deficit widened sharply to $40 billion in October 2026, an increase of $10 billion from September. However, Axis Bank Research believes the deterioration is largely seasonal and unlikely, on its own, to trigger sustained pressure on the Indian rupee.

In its November 13 report, India's US$40Bn deficit largely seasonal; INR pressure contained, Axis Bank said higher gold imports accounted for approximately $5 billion, or half, of the monthly increase in the trade deficit.

The rise was primarily attributed to a delayed pickup in festive demand, although gold imports remained below historical seasonal trends. Oil and non-oil, non-gold trade deficits also widened.

Why Axis Bank sees limited pressure on the rupee

Despite the widening merchandise deficit, Axis Bank expects India's current account deficit (CAD) to remain contained at approximately 1% of GDP in FY27.

A major supporting factor is India's strong services trade surplus, which reached $226 billion on a trailing 12-month basis. Including net transfers, the broader invisibles surplus stood at approximately $332 billion, providing a substantial cushion against the merchandise trade gap.

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The report also highlighted that India's exports grew 45% year-on-year in October, supported by petroleum products, engineering goods and electronics.

Meanwhile, non-oil, non-gold imports increased 33%, reflecting higher prices and sustained domestic demand.

Foreign inflows provide support

The rupee has recently benefited from improving foreign portfolio investment flows, even as global dollar strength and expectations of tighter US monetary policy created volatility.

On November 11, the currency appreciated 0.26% to close at 93.69 against the dollar, its strongest level since April. It was the second-best-performing major Asian currency that day, behind the South Korean won.

Foreign investors had purchased nearly $6 billion worth of Indian equities in November by that point, supporting demand for the domestic currency.

However, the recovery proved uneven. The rupee ended November 13 at 94.24 per dollar, weakening 0.3% over the week as a stronger dollar and renewed crude oil pressures offset foreign inflows.

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What could happen next?

Axis Bank Research noted that foreign portfolio flows had returned strongly in early November, while easing international oil prices were helping reduce pressure on India's external finances.

The bank also highlighted that larger trade deficits during the second and third quarters are generally offset by smaller deficits in the first and fourth quarters.

Nevertheless, risks remain. Stronger US inflation and expectations of further Federal Reserve tightening could strengthen the dollar and weigh on emerging-market currencies.

For India, the balance between foreign capital inflows, global crude prices and dollar movements will remain critical in determining the rupee's near-term direction.

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