India’s merchandise trade deficit widened in Aug-23, to a 10-month high of USD 24.2 bn from USD 20.7 bn in Jul-23. For the month, while both exports and imports expanded sequentially, a faster increase in imports vis-à-vis exports widened the trade deficit. 

Merchandise exports

Merchandise exports were sequentially stagnant in Aug-23 at USD 34.5 bn. On annualised basis, export growth remained in contraction for the seventh consecutive month, at (-) 6.9%YoY. The total merchandise exports have remained in a narrow range of USD 34.3-35.0 bn in the first five months of the current fiscal. 

• Of the 14 key export sub-categories, 7 categories registered an annualised expansion compared to 4 in the previous month. This marks the best annualised sectoral performance of exports in last 9 months. The highest growth was clocked by Ores and minerals (+44.2%YoY) followed by Stone, plaster, cement etc. (+29.3%YoY) and Electronics (+26.3%).

• The biggest drag continued to come from Petroleum products on an annualised basis, which contracted by 30.7% in Aug-23 on account of the relative softness in global crude oil prices (compared to Aug-22). However, on a sequential basis petroleum exports clocked an increase of USD 1.3 bn – accounting for nearly 62% of the sequential jump in exports in the month. This reflects the increase in global crude oil prices by ~12% since end Jul-23
  

• Non-oil exports too rose sequentially by USD 0.9 bn to a 3-month high of USD 28.6 bn from a 3-quarters low of USD 27.7 bn in Jul-23.
  

Merchandise imports

Merchandise imports expanded relatively sharply by 10.8%MoM to USD 58.6 bn in Aug-23. On annualised basis, this translated into a contraction of 5.2%, marking the eighth consecutive month of contraction. 

• The breadth of weakness has narrowed in Aug-23, with 9 of the 15 sub-categories registering annualised expansion, with project goods leading the pack with an expansion of 518%YoY.

• On the other hand, sub-sectors that weighed on headline annualised growth were – Leather (-33.2%YoY), Textiles (-48.1%YoY), Ores and minerals (-35.5%YoY) and Petroleum products (-23.8%YoY).

• On sequential basis, nearly 80% of the monthly momentum was driven by three sub-categories of imports – Gems and jewellery, Gold and Petroleum products. It is likely that the decline in gold prices in Aug-23 could have triggered higher demand, ahead of the festive season along with some lagged impact of withdrawal of Rs 2000 notes.

• NONG imports, a key indicator of domestic demand, picked up to USD 38.3 bn in Aug-23 from USD 35.7 bn in Jul-23, though remaining 7.5% lower on YoY basis.
  

Services Trade

Services trade surplus is estimated to have remained broadly unchanged in Aug-23, at USD 12.5 bn i.e., same as in Jul-23. 

• Both, services exports and imports were little changed compared to previous month at USD 26.4 bn and USD 13.8 bn respectively

• On a cumulative basis, the net services trade surplus for the Apr-Aug’23 period stood higher at USD 61.4 bn as compared to USD 50.7 bn in the corresponding period of the previous year. 
  

On a consolidated goods and services basis, the trade deficit for Aug-23 is lower at USD 11.7 bn vs USD 14.6 bn in Aug-22. For the cumulative 5 month period, the consolidated deficit stands at USD 37.5 bn as against USD 62.1 in Apr-Aug’22. 

CAD Outlook

On a FYTD basis, the merchandise trade deficit stands moderately reduced at USD 98.9 bn vs. USD 112.8 bn over the same period last year. The comfort on trade deficit that had been in place so far in FY24, nevertheless is gradually on a wane, with a strong possibility of a further deterioration owing to: 

• Increase in global commodity prices seen in recent weeks reflecting the resilience in US economy, persistence of geopolitical factors and the gradually increasing policy stimulus in China. Global crude oil prices are currently trading over USD 93 pb post Saudi Arabia and Russia’s decision to extend production cuts of 1.3 million bpd up till the end of the calendar year, typically when energy demand sees a seasonal rise.
  

• Moreover, India’s price advantage of importing Russian oil has narrowed considerably as Russian oil now trading above USD 83 pb, higher than the price cap set by G7 countries.

• Export restrictions on select agri commodities such as rice and wheat, to rein-in domestic price pressures but will reduce such exports.

• Global merchandise trade continues to remain on a moderating path. As per UNCTAD, nowcast of global trade in merchandise goods stands at 0.4% for Q3 2023 (as of 12^th Sep, 2023) compared to near flat growth in Q2.

• Having said so, the impending licensing requirement for imports of laptops, tablet and personal computers may offer some respite at the margin due to a potential reduction of electronic goods imports.
  

While the surpluses on the services front had seen a good traction in FY23, the sequential growth is slow in the first half of FY24. The net services receipts have been in a narrow range of USD 11.5-12.6 bn in the five months of the current fiscal.

We continue to expect FY24 current account deficit at USD 53 bn (1.4% of GDP) vs. USD 67 bn (2.0% of GDP) in FY23, with size of deficit likely to expand in H2 FY24 vs. H1. Nevertheless, we will relook for a possible upward revision in CAD number post the release of Q1 FY24 BoP numbers later this month. 

Rupee outlook

While the Indian Rupee has been trading with subdued volatility compared to peers, it has been depreciating at a gradual pace in last 2-3 months. USDINR is currently trading close to its record high level of 83.21 and could show bias for further weakness in the near-term.

Rapid increase in international commodity prices (esp. crude oil) in recent months, and the dissipation of strategic advantage in the form of cheaper imports from Russia are the key reasons that would put incremental pressure on India’s CAD. With capital flows unlikely to be playing a neutralizing role, this could manifest in waning of BoP advantage in FY24, esp. in H2.

Meanwhile, although market participants appear to be divided on the need for one final round of rate hike from the Federal Reserve, the USD continues to gain amidst prospects of ‘soft landing in US’ coupled with a weaker EUR, which depreciated after the ECB signalled an end to its current rate hike cycle. Further, CNY continues to remain somewhat weak due to slowdown concerns in China.

As such, we maintain our call of USDINR moving towards 84 levels by Dec-23. Having said so, seasonal strength in March quarter BoP coupled with expectation of market positioning ahead of Fed’s pivot (anticipated in Jun-24 quarter) that could weigh upon the dollar, we continue to expect USDINR to partially retrace towards 82 levels by Mar-24.

Says Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research “The optimism on the CAD and the BoP have started to decline particularly after the unexpected rise in crude oil prices since Aug-23. Going ahead, merchandise trade deficits are likely to remain elevated and will lead to higher CAD in Q2 and Q3 unless there is a strong growth in services exports. Although India remains one of the fastest growing nations in the world in the current fiscal, higher interest rates for a longer period in US and elsewhere in the developed economies may not allow any significant pickup in capital flows. Such dynamics is already reflected in the foreign exchange reserves which has remained largely at the same level over the last three months. The INR will continue to remain under pressure over the near term with a possible return of strength in the last quarter of the fiscal.”   

Table 1: Highlights of India’s trade balance

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

Chart 1: India’s recent trade performance (%YoY)