India‟s trade deficit narrowed to USD10.9bn in August (Nomura: USD8.5bn) from
USD12.3bn in July due to strong exports. Exports rose 13% y-o-y in August, following
11.6% growth in July, led by improving global demand. Even as global demand
improved, weak domestic demand and the clampdown on gold imports kept imports
under check, contracting by 0.7% y-o-y in August compared with a decline of 6.2% in
July. Within imports, gold imports moderated sharply to USD0.65bn from USD2.2bn in
July; non-oil imports contracted 10.4% y-o-y versus a decline of 5.3% in July; while oil
imports rose sharply to 17.9% y-o-y from - 8%. Hence, higher oil imports (due to high
oil prices) largely offset the benefit of lower gold imports and slowing domestic
demand.
Looking ahead, a seasonal rise in imports during the festive season and higher oil
prices should result in a slightly higher trade deficit in Q4 2013, relative to Q3.
However, an environment of better global growth and weak domestic demand should
correct the current account deficit this fiscal year. We expect the current account
deficit to moderate to USD65bn in FY14 (year ending March 2014) from USD88.2bn in
FY13. Even as the current account deficit moderates, we expect financing of the deficit
to remain difficult. We would expect weak growth to result in a slowdown in growthsensitive flows, both equity and overseas borrowing by corporates, which can offset
inflows through other routes. Hence, we expect the balance-of-payment pressure to
persist (see our Asia Special Report, India and Indonesia: External funding gaps and
policy responses, 30 August 2013). According to Craig Chan, our head of Asian FX
strategy, the recent measures announced (on FCNR(B) deposits and the dollar swap
window for oil companies) provide a near-term respite, but we remain cautious on a
sustained rally in INR because of the continued negative fundamentals, mainly from
weak growth and the high level of foreign investor equity positioning.
Hence, even as the macro backdrop appears to be stabilizing, we do not expect a
sustainable turnaround. Continuing concerns over the growth outlook, rising credit
risks, deteriorating bank asset quality and worsening fiscal pressures suggest that
risks remain skewed to the downside over the next six months.
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USD12.3bn in July due to strong exports. Exports rose 13% y-o-y in August, following
11.6% growth in July, led by improving global demand. Even as global demand
improved, weak domestic demand and the clampdown on gold imports kept imports
under check, contracting by 0.7% y-o-y in August compared with a decline of 6.2% in
July. Within imports, gold imports moderated sharply to USD0.65bn from USD2.2bn in
July; non-oil imports contracted 10.4% y-o-y versus a decline of 5.3% in July; while oil
imports rose sharply to 17.9% y-o-y from - 8%. Hence, higher oil imports (due to high
oil prices) largely offset the benefit of lower gold imports and slowing domestic
demand.
Looking ahead, a seasonal rise in imports during the festive season and higher oil
prices should result in a slightly higher trade deficit in Q4 2013, relative to Q3.
However, an environment of better global growth and weak domestic demand should
correct the current account deficit this fiscal year. We expect the current account
deficit to moderate to USD65bn in FY14 (year ending March 2014) from USD88.2bn in
FY13. Even as the current account deficit moderates, we expect financing of the deficit
to remain difficult. We would expect weak growth to result in a slowdown in growthsensitive flows, both equity and overseas borrowing by corporates, which can offset
inflows through other routes. Hence, we expect the balance-of-payment pressure to
persist (see our Asia Special Report, India and Indonesia: External funding gaps and
policy responses, 30 August 2013). According to Craig Chan, our head of Asian FX
strategy, the recent measures announced (on FCNR(B) deposits and the dollar swap
window for oil companies) provide a near-term respite, but we remain cautious on a
sustained rally in INR because of the continued negative fundamentals, mainly from
weak growth and the high level of foreign investor equity positioning.
Hence, even as the macro backdrop appears to be stabilizing, we do not expect a
sustainable turnaround. Continuing concerns over the growth outlook, rising credit
risks, deteriorating bank asset quality and worsening fiscal pressures suggest that
risks remain skewed to the downside over the next six months.
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