India’s merchandise trade deficit narrowed in Sep-23 to USD 19.4 bn from USD 21.7 bn in Aug-23. For the month, while both exports and imports contracted sequentially, a faster decline in imports vis-à-vis exports drove the moderation in trade deficit. 

Merchandise exports

Merchandise exports contracted by 10.4%MoM in Sep-23 to USD 21.7 bn. On annualised basis, export growth contracted by 2.6%, to remain in negative in 8 out of the last 10 months, reflecting the strong global headwinds. 

• Of the 14 key export sub-categories, 5 registered an annualised expansion compared to 7 in the previous month. The highest growth was clocked by Stone, plaster, cement etc. (+50.5%YoY) and Ores and minerals (+39.9%YoY).

• The biggest drag came from Leather (-21.2%YoY), Gems and Jewellery (-16.0%YoY) and Petroleum products (-10.6%YoY). While oil exports continue to contract on annualised basis, the last two months have seen a sequential pick-up reflecting the jump in crude oil prices. Recall, Brent crude jumped from USD 75 pb in Jun-23 to USD 93 bn in Sep-23 on average basis.
  

• Notable electronics exports posted a minor annualized contraction (-3.7%YoY) for the first time in 31-months.

• As such, core exports (i.e., Exports minus Petroleum and Gems & Jewellery exports) fell to an 11-month low of USD 24.8 bn in Sep-23 from USD 30.0 bn in previous month.
  

Merchandise imports

Merchandise imports contracted by 10.5%MoM to USD 53.8 bn in Sep-23. On annualised basis, this translated into a contraction of 15.0% - marking the ninth consecutive month of de-growth.

. 

• At a granular level, only 5 of the 15 sub-categories registered an annualised expansion within imports.

• Electronic items, with a growth of 13.3%YoY emerged as the best performer, followed by Plastic & Rubber Articles (+10.8%YoY) and Base metals (+5.8%YoY)
  

• On an annualized basis, drag on imports was prominent in case of Textiles (-55.2%YoY), Transport Equipment (-53.1%YoY), Ores & Minerals (-28.6%YoY), Chemicals (-24.2%YoY), Project Goods (-23.5%YoY), Leather (-21.7%YoY), and Petroleum Products (-20.3%YoY).

• Core imports slipped to a 3-month low of USD 33.6 bn vs USD 39.8 bn in Aug-23.

• Sequentially, oil imports rose by 5.9%MoM to USD 14.0 bn in Sep-23, marking second consecutive month of increase, mirroring the rise in global crude oil prices. Having said so, crude import volume is likely to have been lower in Sep-23 considering the maintenance related shutdown in some refineries.

Trade Balance

• Core trade deficit moderated to USD 8.8 bn from USD 9.9 bn in Aug-23. The sequential moderation was primarily driven by Chemical Products, Machinery Items, and Ores & Minerals.

• On the non-core front: Petroleum trade deficit widened marginally by USD 0.2 bn to USD 7.5 bn.
  

• Gems and Jewellery trade deficit moderated by USD 1.4 bn to USD 3.1 bn on account of lower gold imports.

Services Trade

Services trade surplus is estimated to have risen in Sep-23 to USD 14.5 bn compared to USD 13.6 bn.

• While receipts from services exports rose by USD 2.3 bn month over month to a 6-month high of USD 29.4 bn, imports dropped by USD 1.3 bn to USD 14.9 bn.

Outlook

Recent trade numbers have seen somewhat sizeable revisions for months of Jul-Aug-23 - an average upward revision of USD 2.3 bn over Jul-Aug FY24 compared to an average upward revision of USD 0.4 bn in Q1 FY24.

• Revisions were primarily on account of petroleum products, with oil exports and imports being revised up by USD 3.8 bn (a record high) and USD 1.5 bn respectively in Aug-23.

For H1 FY24, trade deficit stands at USD 115.9 bn vs. USD 140.8 bn over the same period last year. Nevertheless, the comfort on trade deficit that had been in place in H1 of FY24 is gradually on the wane, with a strong possibility of a further deterioration in H2 owing to -

• Increase in global commodity prices seen in recent weeks reflecting resilience in US economy, persistence of geopolitical factors and policy stimulus in China.
  

• Moreover, India’s price advantage of importing Russian oil has narrowed considerably as Russian oil trading above imposed price cap of USD 60 pb.

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

• Global merchandise trade continues to remain on a moderating path. As per IMF’s latest World Economic Outlook update, world trade volumes are expected to rise by a meagre 0.9% YoY in 2023 vs. 2.4% projected earlier.

• Festive season led spurt in imports. Government has also scrapped the requirement of license for laptops/tablets, that was to begin 1^st Nov-23 onwards.
  

We now expect FY24 current account deficit at USD 67 bn (1.9% of GDP) i.e., unchanged from FY23 levels, with size of deficit likely to expand in H2 FY24 vs. H1.

Rupee outlook

Notwithstanding INR’s tendency to sporadically flirt with its record low levels in FY24 so far, the price action continues to be marked by extremely low levels of variation. In fact, with a 1.3% depreciation on FYTD basis, INR stands out as one of the best performing major currencies (barring CHF, CAD, and GBP among DMs, and CLP and PLN among EMs).

Having said so, from the near-term perspective the rapid increase in international commodity prices (esp. crude oil) in recent months and the recent tensions between Israel - Hamas, along with the dissipation of strategic advantage in the form of cheaper imports from Russia are the key reasons that would put incremental pressure on the CAD. With capital flows unlikely to be playing a neutralizing role, this could manifest in the dilution of BoP comfort in the coming quarters. As such, we expect rupee to face some pressure in the near term, with likelihood of USDINR moving towards 84 levels by Dec-23.

In the slightly longer term, the rupee could benefit from: 1) Market positioning for beginning of Fed’s rate easing cycle (likely from Jun-24 quarter) should start pulling down dollar, 2) JP Morgan’s decision to include India in its EM Bond Index from Jun-24 onwards could potentially result in USD 20-21 bn foreign debt inflow by Mar-25. Positioning by active investors could be INR positive, 3) The usual financial year-end favorable seasonality in Mar-24. As such, we maintain our view of rupee being able to claw back some of the lost ground, with likelihood of USDINR moving towards 82 levels by Mar-24.

Summarises Suman Chowdhury, Chief Economist and Head-Research “Two fundamental factors have altered the expectations regarding a significant improvement in India’s external position in FY24. One is clearly the sharp rise of 15% in crude oil prices in the Aug-Sep’23 period along with the continuing risk of a further rise, given the increased geo-political threats in West Asia. Slower exports due to the global slowdown along with higher crude oil costs are set to aggravate the trade and the current account deficit in the second half of the current fiscal. Secondly, the continuing uncertainty on the duration of the high interest rates in US and elsewhere in the developed nations will keep the capital outflow risks high. While we expect some of these factors to normalize by Q4FY24, the trade, CAD and BoP figures are likely to see enhanced volatility in the near term. This will also translate into a volatility in the INR levels and increase the likelihood of it breaching the level of 84 to a dollar although we expect the latter to stabilize around 82 by Mar-24.” 

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 trade balance: By sub-categories