India’s merchandise trade deficit widened marginally in Jul-23, to USD 20.7 bn from USD 18.8 bn in Jun-23 (revised lower from USD 20.1 bn). Sequentially, while both exports and imports moderated, a faster contraction in exports vs. imports led to the widening.

Merchandise exports

Merchandise exports contracted sequentially by 6.1%MoM to USD 32.3 bn in Jul-23. On annualised basis, export growth remained in negative territory for the sixth consecutive month, contracting by 15.9% in Jul-23.

• Of the 14 key export subcategories, only 4 registered an annualised expansion. Electronic goods continued to post a healthy expansion of 13.1% YoY, benefiting from the Government’s PLI scheme, but for the first time in 13-months were not the best performer. Export sub-category of Stone, Plaster, Cement, etc. clocked the highest growth of 20.8% YoY.
  
• The biggest drag continues to come from Petroleum products, which contracted by 43.7%YoY in Jul-23, on account of the softness in global crude oil prices. Notwithstanding the recent increase of 17.3% since end Jun-23, Brent crude is still trading 32.4% lower vis-a-vis last year’s Jun-22 peak.

• Overall, non-oil exports clocked a 9-month low of USD 27.7 bn, clearly underscoring the weakness in global demand.

Merchandise imports

Merchandise imports moderated by 0.4%MoM to USD 52.9 bn in Jul-23. On annualized basis, import growth contracted for seventh consecutive month by 17.0%.

• The breadth of weakness was broad based with 10 out of 15 sub-categories registering annualised contraction. Electronics and machinery items emerged as strong outperformers clocking a growth of 14.9%YoY and 13.5% respectively..
  
• Oil imports came at USD 11.8 bn, down 6.3%MoM to mark the lowest level since Aug-21. As per industry sources, India’s price advantage of importing Russian oil is narrowing as Russian oil has breached the price cap set by G7 countries.

• Gems and Jewellery imports though eased from a 9-month high of USD 7.3 bn in Jun-23 to USD 5.5 bn in Jul-23 but have continued to remain strong over the last three months. Withdrawal of Rs 2000 bank note along with wedding season have supported domestic demand, even as gold prices remain elevated.
• NONG imports, a key indicator of domestic demand, picked up to USD 35.7 bn in Jul-23 from USD 33.3 bn in Jun-23, though remaining 7.5% lower on YoY basis. .

Services Trade

Services trade surplus is estimated to have eased marginally in Jul-23, to USD 12.3 bn from USD 12.6 bn in Jun-23 due to a higher sequential decline in exports vs. imports 

• Services exports and imports are estimated to have fallen by 2.5%MoM each to USD 27.2 bn and USD 14.9 bn respectively

CAD Outlook

The run-rate, so far for India’s merchandise trade deficit exudes comfort, which could however wane in the coming quarters owing to –

• Increase in global commodity prices seen in recent weeks reflecting the resilience in US economy, persistence of geopolitical factors and policy stimulus in China.  
• Export restrictions on select agricultural commodities and fresh imports on some other such as pulses to rein-in domestic price pressures
  
• Global merchandise trade continues to remain on a moderating path. As per UNCTAD, nowcast of global trade in merchandise stands at 0.5% for Q3 2023 (as of Aug 8, 2023) compared to 0.2% in Q2.

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.

Rupee outlook

Despite having the comfort of a moderate CAD accompanied by a BoP surplus, INR weakened to an all-time low, breaching the 83 level earlier this week. In recent weeks, the following factors have weighed upon the domestic currency:

• Show of resilience by US economy has once again raised the likelihood of another 25 bps rate hike by the Fed in Sep-23. In contrast, despite breaching the upper threshold of inflation tolerance, RBI’s maintenance of status quo has increased the monetary policy divergence and the risk of fresh capital outflows.
  
• With USD clawing back strength, other EM currencies are on a back foot. For EMs, additional factor of a lower CNY (on account of weaker than expected growth momentum and renewed concerns over real estate stability in China) further imparts weakness to other currencies. 
  
• Recent surge in commodity prices, esp. crude oil, has also exacerbated the impact of the above-mentioned factors on INR.

As such, depreciation pressure on INR could persist in near term though active intervention from the RBI could continue to guard against excess volatility. Over medium term, this is likely to provide some upside risk to our year-end USDINR forecast of 81.

Says Suman Chowdhury, Chief Economist and Head, Research, Acuité Ratings & Research “The improving trend in the current account balances (lower deficit) has been slowed down by the headwinds in merchandise exports which has dropped by 14.5% YoY in the first four months of the fiscal. Given the resilience in the domestic economy and a gradual pickup in private sector capex, non-oil imports may hold up better in the rest of the year and along with a fresh rise in crude oil prices, may increase the deficit on the merchandise side. Further, the volatility in the capital account is likely to persist with uncertainty on the Fed stance in the rest of the year as compared to the extended pause by RBI. This is reflected in the weakness seen in the INR over the first two weeks of August.” 

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: Global trade nowcast for Q3-23 points towards weak growth outcome

Chart 2: Services exports continues to offer comfort on total trade balanc