Markets
Trade winds carry no goods cheer in August
Summary
Akin to July, much of the decline in exports and imports in August was driven by the sharp year-on-year contraction in oil shipments led by lower price and volume.
Goods trade marked another month of lacklustre performance. Trade deficit widened to a 10-month high of $24 billion in August as import and export performance remained dismal. Headline exports contracted by 6.9% year-on-year last month, a faster pace compared to the 5.2% drop seen in imports.
Akin to July, much of the decline in exports and imports in August was driven by the sharp year-on-year contraction in oil shipments led by lower price and volume. But what is encouraging is that stripping off the volatile items of oil, gold and gems and jewellery; both core exports and imports have shown some signs of recovery with an increase in shipment of some heavyweight items.
The uptick in core imports reflects robust domestic demand and resilient economic momentum. Notably, the increase is broad-based across consumption items like electronics and capital goods, electrical and non-electrical machinery, and project goods. While this reinstates confidence in India’s growth story, an upturn in imports also casts concern over the already widening trade gap.
Here, in the near term, there are upside risks to imports. This could primarily arise from higher global oil prices amid supply cuts by the Organization of the Petroleum Exporting Countries. The benchmark Brent crude oil price is now trading above $90 per barrel. If crude prices remain strong, it will exert upward pressure on India’s oil import bill, in turn, leading to further widening of the trade deficit.
To be sure, oil imports have already risen by 12% month-on-month in August. “Incorporating the recent rise in crude oil prices we see upside risk to our current account deficit estimate to 1.8% of GDP in FY24. USDINR trading range is expected to be between 84 to 82, till December 2023. Depreciation pressures on INR is expected to be higher in the near-term with crude oil prices above $90 per barrel and dollar strength," wrote Gaura Sen Gupta of IDFC First Bank in a report on 16 September.
Moreover, in August, gold imports have risen as much as 39% y-o-y. The prospects for gold imports remains healthy owing to the solid demand in the upcoming festival and wedding season. Further, the likely surge in consumer spending driven by festival demand may aid imports of consumer goods like electronics, gems and jewellery and ready-made garments. Also, sustained momentum in India’s capex cycle would likely aid demand for capital goods. This may support imports and thereby, to that extent, curtail the narrowing in the trade deficit.
In short, this means that a combination of resilient domestic demand along with subdued external growth is likely to create upward pressure on the trade deficit in the coming months. Besides, there have been some other recent unsettling developments, too, on the external front. Services exports likely contracted by 0.4% y-o-y in August, as per government estimates. This is the first negative reading after many months.
Meanwhile, on the capital flows front, data from NSDL shows that foreign portfolio investment in Indian markets turned negative in September, after remaining positive in the preceding months. Net FDI inflows fell sharply to $5 billion in Q1FY24 from $13 billion in the same period previous year, as per latest Reserve Bank of India data. In this backdrop, investors will watch the outcome of the US Federal Reserve meeting this week.
The evolving risks warrant monitoring of the external sector dynamics. With imports expected to stay high, concerted measures to boost exports alongside strengthening services trade and sustaining capital inflows would be crucial to keep the rupee on a steady footing. This should also ward off the depreciation pressures seen lately.
