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Nov-23 External Trade: Quick correction in deficit

18 Dec 2023

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KEY TAKEAWAYS 

  1. India’s merchandise trade deficit mean reverted in Nov-23 to USD 20.6 bn from a record level of USD 29.9 bn in Oct-23. The sequential correction was entirely on account of imports, as exports posted a mild increase. 
  2. Core imports eased marginally to USD 34.6 bn from USD 35.3 bn in Oct-23, implying that the bulk of sequential correction in headline imports was owing to moderation in Gold and Oil imports. 
  3. Services trade surplus is estimated to have risen in Nov-23 to an 11-month high of USD 15.3 bn from USD 14.6 bn in Oct-23. 
  4. The quick drop of USD 9.3 bn in merchandise trade deficit in Nov-23  from a sharp surge by USD 10.5 bn in Oct-23, appears somewhat unusual and one-off. 
  5. Overall, we maintain our FY24 current account deficit forecast at USD 67 bn (1.9% of GDP) i.e., unchanged from FY23 levels, but do see some downside risks emanating to our view as global commodity prices have been comfortable in recent weeks and past trade deficit numbers undergo a downward revision. 

India’s merchandise trade deficit reverted in Nov-23 to USD 20.6 bn from a record level of USD 29.9 bn (revised lower from USD 31.5 bn) in Oct-23. The sequential correction was entirely on account of imports, as exports posted a mild increase.


Merchandise exports

Merchandise exports stood at USD 33.9 bn (1.1% MoM and -2.8% YoY) in Nov-23.

  1. Of the 14 key export sub-categories, only 5 registered an annualised expansion. The highest growth was clocked by Ores and minerals (+116.1%YoY) followed by Gems & jewellery (12.0% YoY).
  2. Drag on exports in annualised terms was led by Leather (-15.0%), Marine products (-13.7%) and Agri & allied products (-8.2%). In addition, petroleum exports continued to contract on annualised basis for the 10th consecutive month, the second worst performer to Leather exports – which on annualised basis have been in contraction over the last one year. 
  3. Core exports (i.e., Exports excluding Petroleum and Gems & Jewellery exports) fell marginally to USD 23.6 bn from USD 24.6 bn in Oct-23.

Merchandise Imports

Merchandise imports scaled back from a record high of USD 63.5 bn in Oct-23 to USD 54.5 bn in Nov-23. On annualised basis, this translated into a de-growth of 4.3%.  

  1. At a granular level, 6 of the 15 sub-categories registered an annualised expansion within imports. Leather imports, clocking a growth of 29.6%YoY emerged as the best performer, followed by Base metals (14.2%) and Electronic items (10.1%)
  2. Drag on imports was led by Chemicals (-20.7%), Transport equipment (-18.6%), Paper (-17.7%) and Agri & allied products (-17.0%)
  3. Core imports eased marginally to USD 34.6 bn from USD 35.3 bn in Oct-23, implying that the bulk of sequential correction in headline imports was owing to moderation in Gold and Oil imports. 

Trade balance

The entire sequential correction in monthly merchandise trade deficit was on account of non-core i.e., Gems & jewellery and petroleum products, as core deficit widened marginally (to USD 11.0 bn from USD 10.7 bn in Oct-23).

  1. Petroleum trade deficit moderated by USD 4.2 bn to USD 7.5 bn in Oct-23. 
  2. Gems and Jewellery trade deficit moderated by USD 5.4 bn to USD 2.1 bn on account of lower gold imports. 

Services Trade

  1. Services trade surplus is estimated to have risen in Nov-23 to an 11-month high of USD 15.3 bn from USD 14.6 bn in Oct-23. This was on account of sequential increase in services exports amidst a marginal decline in imports.  

Deficit Outlook

We had in our last trade note, highlighted the possibility of Nov-23 trade deficit print moderating from record high levels in Oct-23 on account of tapering of festive demand along with easing of crude oil prices. Nevertheless, the quick incremental correction of USD 9.3 bn of Nov-23 from a sharp jump in merchandise trade deficit by USD 10.5 bn in Oct-23 is somewhat unusual and can be considered as one-off. 

 

From an outlook perspective, we continue to believe that merchandise trade deficit in H2 FY24 would be wider in comparison to H1 FY24, owing to sluggish growth in global trade volumes, domestic export restrictions on select agricultural commodities and India’s strategic advantage of importing relatively cheaper Russian oil dissipating. 

 

However, there are some downside risks emanating to our FY24 CAD forecast of USD 67 bn owing to –

  1. Global commodity prices have offered comfort in recent weeks. Normalisation of supply chains, moderation in global demand and absence of further escalation of geopolitical risks have helped. Crude prices particularly have continued to trend lower despite Israel-Hamas war lingering on. Brent oil has averaged at USD 76 pb in Dec-23 so far, compared to USD 83 bn in Nov-23. 
  2. Data revisions have seen downward adjustment of monthly merchandise trade deficit print over the last few months.  

Rupee Outlook

After facing persistent, albeit mild depreciation pressure over five consecutive months, INR is finally making at attempt to recoup some of its recent losses. The currency has strengthened by around 40 paise against the USD after reaching a low of INR 83.4 in the first week of Dec-23. This is in line with the drop in the dollar index futures by around 2% and a sharp correction in 10 year US Treasury yields by 120-130 bps over the same period. 

 

This development is aligned to our call on INR (82.5 levels by Mar-24). However, the price action appears to be taking place somewhat ahead of our expectation.

  • INR had broadly ignored the gradual softness of US economic data in last 1-2 months. However, the Fed policy outcome in Dec-23 seems to have moved the needle. Market participants have perceived the FOMC outcome as dovish with the latest dot plot adding one more rate cut to 2024 (with cumulative rate cuts now projected at 75 bps vs. 50 bps earlier). While this was counterbalanced by reducing one rate cut from 2025 (with cumulative rate cuts now projected by the FOMC at 100 bps vs. 125 bps earlier), markets have chosen to focus on the near-term with the ‘Fed pivot’ theme fuelling risk-on sentiment.


Says Suman Chowdhury, Chief Economist and Head – Research “The trade deficit is likely to remain elevated in the rest of the current fiscal due to the export headwinds and high imports induced by strong domestic demand. This will get reflected in a CAD which is likely to hold up at around 2.0% in FY24. Nevertheless, as argued in our previous notes, INR could remain supportive in Q4 FY24 on account of favorable year-end seasonality and market positioning ahead of India’s inclusion in JPM EM bond index (from Jun-24). While global geopolitical risk and domestic election related uncertainties remain on the table, the tail risks have reduced significantly amidst the current softness in commodity prices and the just concluded state elections (that on aggregate basis went in favor of the incumbent BJP government at the centre).” 




Table 1: Highlights of India’s trade balance*




Chart 1: The mean reversion in trade deficit in Nov-23 was driven by non-core deficit