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Nov-24 Trade Deficit: The golden curse

18 Dec 2024

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KEY TAKEAWAYS 

  1. India’s total external trade (merchandise and services) deficit widened sharply to a record high of USD 19.9 bn in Nov-24 from USD 10.0 bn in Oct-24. 
  2. This was on account of a sharp increase in the merchandise trade deficit to a record high level of USD 37.8 bn in Nov-24.
  3. Although the services trade surplus scaled a record monthly high of USD 18.0 bn in Nov-24, it wasn’t enough to offset the overwhelming drag from merchandise trade deficit.
  4. Import of precious metals explains 83% of incremental expansion of the merchandise trade deficit. The spike in gold demand can be attributed to seasonal demand led by weddings and a sequential drop in international price after four months of increase.
  5. The spike in gold demand should normalize in the coming months. Meanwhile, while oil imports have begun to moderate from elevated levels in Oct-24, the moderation in crude oil prices in last 3-4 months offers further scope for correction.   
  6. We continue to maintain our current account deficit forecast of 1.2% of GDP vs. 0.7% in FY24.
  7. We continue to maintain our end FY25 USDINR forecast of 85.50.

India’s total external trade (merchandise and services) deficit widened sharply to a record high of USD 19.9 bn in Nov-24 from USD 10.0 bn in Oct-24. This was on account of a sharp increase in the merchandise trade deficit to a record high level of USD 37.8 bn in Nov-24 (up from USD 27.1 bn in Oct-24). Although the services trade surplus (as estimated by the Commerce Ministry) also scaled a record monthly high of USD 18.0 bn in Nov-24 (up from USD 17.1 bn in Oct-24), it wasn’t enough to offset the overwhelming drag from merchandise trade deficit.  

 

Merchandise Exports

Merchandise exports stood at a 25-month low of USD 32.1 bn in Nov-24 (-18.1% MoM and -4.9% YoY) versus USD 39.2 bn in Oct-24. 

  1. Of the 14 key sub-categories of exports, 8 registered annual expansion. 
  2. The best performance was seen in the case of Electronic items (54.7% YoY), Agriculture and allied products (28.8% YoY), Marine products (17.8% YoY), Plantation products (15.7% YoY), and Machinery tools (13.7% YoY). 
  3. In contrast, the drag on exports was led by Petroleum products (-49.7% YoY), Ores and minerals (-39.5% YoY), Gems and jewellery (-26.3% YoY), and Stone, plaster, cement (-6.5% YoY), etc.
  4. In value terms, rice exports clocked a record high of USD 1.1 bn in Nov-24. 
  5. Although core merchandise exports (i.e., exports excluding Petroleum and Gems & Jewellery) moderated to a 12-month low of USD 26.3 bn, they managed to post a moderately strong growth of 11.8% YoY, thereby marking twelve successive months of annualized expansion.

Merchandise Imports

Merchandise imports rose to a record high of USD 70.0 bn in Nov-24 (+5.4% MoM and +27.0% YoY), exceeding its previous monthly high of USD 66.3 bn in Oct-24. 


  1. At a granular level, 11 out of 15 key import sub-categories registered annualized expansion. 
  2. Strongest growth was clocked by Gems and jewellery (234.7% YoY), Textiles (76.2% YoY), Agriculture and allied products (58.9% YoY), Project goods (41.1% YoY), etc. 
  3. In contrast, the drag on imports emanated from Leather goods (-41.6% YoY), Ores and minerals (-23.1% YoY), Base metals (-9.5% YoY), and Transport equipment (-5.2% YoY).
  4. In value terms, the following items clocked a record high monthly import in Nov-24: Gold (USD 14.9 bn) and Fruits and vegetables (USD 0.3 bn). 
  5. Unlike headline imports that showed a spike, core merchandise imports (i.e., imports excluding Petroleum and Gems & Jewellery) moderated to USD 37.4 bn in Nov-24 from USD 39.2 bn in Oct-24. On annualized basis, core merchandise imports clocked a moderately positive run rate of 6.1%, its eighth consecutive month of expansion.

Merchandise Trade Balance

The sequential deterioration in the merchandise trade deficit was driven by the sharp spike in imports along with a moderation in exports.

However, this was predominantly driven by the Gems and jewellery trade deficit that touched a record high of USD 14.4 bn in Nov-24. Filtering out the impact of non-core factors (petroleum and precious metals), we note that the core merchandise deficit posted a relatively moderate increase to USD 11.0 bn in Nov-24 vis-à-vis USD 7.8 bn in Oct-24 and USD 11.6 bn in Nov-23.

Services Trade


  • Services exports are estimated to have clocked a record monthly high of USD 35.7 bn in Nov-24 (+4.0% MoM and +26.9% YoY). In terms of value, we note that services exports exceeded merchandise exports in Nov-24 (the last time it happened was at the beginning of the Covid pandemic in Apr-20 when most countries had some form of a lockdown in place).
  • Services imports are also estimated to have risen to a record high of USD 17.7 bn in Nov-24 (+2.7% MoM and +29.2% YoY) 
  • Despite both exports and services imports creating new monthly records, the net services trade surplus improved due to a relatively higher pace of sequential increase in exports over imports.


Outlook


There has been exceptional volatility in the recent monthly prints of India’s trade deficit on account of petroleum and precious metals. Notably, in two (Aug-24 and Nov-24) out of the last four months, the deficit on account of precious metals has exceeded the deficit due to petroleum items. This is a rare occurrence.

 

The sharp jump in imports of precious metals in Nov-24 on account of gold purchases is somewhat perplexing as this happened in the post Dussehra/Diwali period, which is typically associated with festive related demand in India. We suspect this could reflect other forms of seasonal demand (as per media reports, the wedding season during Nov-Dec 2024 is projected to see 4.8 mn weddings, up ~37% from the corresponding period in 2023). In addition, a price drop of 1.5% for gold during the month of Nov-24 after four consecutive months of sharp increases, could have provided an opportunity for a step-up in purchases.

 

If the above assertion is true, then the spike in gold demand should normalize in the coming months. Meanwhile, although oil imports have begun to moderate from elevated levels in Oct-24, we believe the moderation in crude oil prices in last 3-4 months offers further scope for correction. 

 

Amidst the FYTD (Apr-Nov) expansion in total trade deficit to USD 83 bn vs. USD 67 bn over the corresponding period in FY24, we continue to maintain our current account deficit forecast (CAD) of 1.2% of GDP vs. 0.7% in FY24.

Our estimate at this stage does not take into account any disruption to global trade on account of a tariff war triggered by the US president-elect Trump. The risk of US tariffs (including any action on employment visas) will have to be assessed along with its impact of retaliatory action by other countries.

 

Rupee Outlook

 

The Indian rupee has come under pressure in 2024, hitting a record low of 84.90 in December, driven by a combination of global and domestic factors. Globally, the broad-based strength of the U.S. dollar, bolstered by resilient U.S. economic data and Trump’s victory in the November presidential election, has created proved favourable for the US dollar, pressurising emerging market currencies. Domestically, India’s macroeconomic conditions added to the rupee’s woes. Q2 FY25 GDP growth slowed sharply, reflecting subdued domestic demand and weakening exports, while Q3 FY25 saw inflation surge, eroding purchasing power and investor confidence. The Reserve Bank of India responded with aggressive interventions, selling foreign currency reserves to curb volatility, resulting in a $51 billion drawn between September and December 2024. To mitigate further outflows, the RBI implemented a CRR cut and raised the interest rate ceiling on NRI deposits in its December policy review, aiming to attract stable foreign inflows.

 

On the global stage, currency movements highlighted divergent economic performances and policy responses. The Brazilian real was the worst performer, falling by 26.8% due to fiscal instability and falling commodity prices, while the Japanese yen and South Korean won depreciated by 9% and 9.9%, respectively, due to weak trade balances and diverging monetary policies. Meanwhile, the Thai baht and Malaysian ringgit outperformed their peers. The baht remained stable, supported by a surge in gold exports and a strong rebound in tourism, while the ringgit appreciated by 2.6%, driven by targeted foreign investment as well as oil exports. The U.S. dollar’s strength, fuelled by safe-haven demand amid geopolitical tensions and lingering concerns about global economic growth, underscored the long dollar dominance in the currency market.

 

For India, while the RBI’s actions have provided short-term stability, resulting in only 2.1% YTD change, they come with long-term risks. However, domestic fundamentals are expected to improve in the near term, with GDP growth projected to recover to 6.8% and inflation likely to moderate to 4.5% in the coming quarters, which could provide some support to the rupee. Yet, the overarching challenge remains external. A strong U.S. dollar, driven by elevated interest rates, geopolitical risks, and robust U.S. economic performance, could continue to weigh on the rupee. Consequently, despite improving domestic conditions, the USD/INR exchange rate is forecasted to close FY25 at 85.50, highlighting the persistent influence of global headwinds on India’s currency.

 

Says Suman Chowdhury, Chief Economist and Executive Director, Acuité Ratings & Research “The resilience in India’s external position witnessed in the post Covid period has started to witness headwinds due to the new normal in the global landscape which is marked by a new US administration, risks of a global tariff war, stronger than expected US economy and lower than expected rate cuts by Fed in 2025 – all of which have translated to capital outflows from emerging economies and a resurgence of the US dollar. India’s trade deficits have also been higher than expected due to the surge in gold imports and a lack of consistency in the exports trajectory, the latter partly due to the volatility in petroleum exports. While the INR has seen relatively less depreciation in the current calendar year compared to most other currencies, it has been actively supported by RBI’s intervention in the market which has also led to a decline in the central bank’s forex reserves in the last 3 months. We continue to expect a higher CAD of 1.2% in FY25 and have a INR forecast of 85.5 as on March 2025.”


 Table 1: Highlights of India’s merchandise trade balance*



*Note: Numbers may not add up due to rounding off and revision in headline exports and imports

Chart 1: Record high merchandise trade deficit offsets the record high services trade surplus in Nov-24




Chart 2: Gems and jewellery imports have shot up significantly in last four months