Appreciating Rupee may be encouraging imports; India’s trade deficit reaches a 28 month high

Brief: India’s trade deficit reaches a 28 month high as gold imports witness 188% growth; Petroleum imports expanded by 30% due to rise in prices and increase in demand; non-petroleum exports rose by 16.8% despite appreciating Rupee; trade is also riding on a favorable base effect.

Impact: Neutral

India’s external sector recorded double digit growth rate for the third month as overall export has expanded by 19.7% in April, FY18. Export of petroleum product that accounts for 12% in overall export - has increased by 48.8% during the said period. This growth in petroleum product has contributed three percentage points (300 bps) to the expansion of overall exports. On the other hand, non-petroleum category that shares 88% in overall exports has expanded by 16.8%. The robust performance despite an appreciating rupee is an encouraging sign; the situation did not deter Indian exporters from competing in a global market that is increasingly characterized by underutilized capacities. Also, export of basic and intermediate items remains strong given stabilization in developed markets.

Imports however kept pace with exports and are growing at 49% during the same month. As a result, the trade deficit reached to $13.2 billion, which is highest in 28 months. Among the sub category, oil import, which accounts for 20% of overall imports has expanded by 30%. Average crude oil price in April, 2017 has recorded $51.7 per barrel as compared to $48.1 in April, 16. This growth in crude oil is due to anticipated supply constraints in light of Russia – Saudi agreements. In terms of prevailing conditions, US supplies continue to be healthy and therefore do not warrant a panic in the near term but prices are on an uptrend nonetheless. In the previous month, oil imports have posted a record growth of 101.3% but we believe that stability will prevail given the fiscal difficulties faced by most oil exporters.

Precious metals (accounts for 11%) on their part have expanded by 188.7% and can be considered a major contributor of this expansion in imports. The robust growth in import of gold and silver, contributed 11 percentage point (1100 bps) to the overall imports. Import of these metals is increasing by an average 200% over the past three months, whereas price of gold has increased by only 0.6% during this period. Even though this may point toward an oversupply in the market, we do not anticipate any downward pressures on prices. India is the second highest gold consuming country next to China and with a healthy monsoon in FY 17, the economic activities in the rural area will further push the gold demand. Since gold is the most preferable investment in rural areas, the current quantum of imports may be justified to an extent. SMERA believes that the import of gold is expected to remain high in FY18.

Moreover, Indian rupee has appreciated significantly against US dollar in April. Average value of Indian rupee against US dollar was 64.3 in April, 2017 as against 66.4 during same month, the previous year. Even though the situation may have impacted bottom lines of exporters, we believe that the appreciation may have encouraged importers as their relative purchasing power received a fillip in the current timeframe. Overall we expect India’s FY18 current account deficit to remain near the 1-1.2% level (percent of the GDP), somewhat near the FY17 number, which SMERA expects to come in at 0.98%.

 

Export (%)

Import (%)

Apr-16

-7.09

-24.16

May-16

-0.61

-13.51

Jun-16

1.47

-7.41

Jul-16

-6.85

-17.99

Aug-16

-0.02

-13.31

Sep-16

4.76

0.05

Oct-16

9.16

8.53

Nov-16

2.75

9.51

Dec-16

6.25

0.36

Jan-17

4.47

10.6

Feb-17

17.53

20.8

Mar-17

27.12

45.15

Apr-17

19.76

49.06

FY16

-15.42

-14.96

FY17

4.88

0.17

Source: GOI; SMERA Research

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