18 Dec 2024
KEY TAKEAWAYS
|
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.
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.
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
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