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Deficit moderates as oil imports ease

* The Oct’21 trade deficit eased to USD19.9bn from a historic high of USD22.9bn in the previous month, due to lower oil imports (down 17.3% MoM). Non-oil non-gold (NONG) imports continued to surge at a healthy rate of 60% YoY on an average during the last eight months. Gold imports stagnated. Exports grew by 6% MoM.

* For YTD FY22 (Apr-Oct’21), the trade deficit stood at USD97.4bn, slightly lower than the prepandemic level of USD100.7bn for the same period in FY20. Compared with pre-pandemic levels (YTD FY20), imports are now higher by 15.8% in YTD FY22, while exports are higher by 25.5%.

* Going ahead, we see a gradual recovery and elevated commodity prices pressurizing the import bill. We expect import growth exceeding export growth, while higher losses in oil-led terms of trade imply that the current account-to-GDP will be back to a deficit in FY22. With our revised Brent forecast of USD71.5/bbl, our FY22 CAD-to-GDP estimate is 1.1%, up from ~0.85% earlier. However, healthy capital flows will ensure that FY22E BoP remains in a surplus of USD48bn. We see USD-INR in the 73.00-75.50 range in the near term.

Trade deficit moderates to USD19.9bn in Oct’21

As per the prelim estimates, the merchandise trade deficit eased to USD19.9bn in Oct’21 from USD22.6bn in the previous month. Imports eased mainly due to lower oil imports and a similar easing was also witnessed in NONG imports. However, current growth in imports remained strong. Sequentially, exports surged 5% MoM, while imports weakened by 1.8% MoM. On an annualized basis, exports and imports grew 42.3% and 62.5%, respectively. Against Oct’19, exports grew 35.2% and imports grew 45.8%. For YTD FY22, exports and imports clocked strong performance, growing by 54.5% (USD232.6bn) and 78.7% (USD331.3bn) YoY, respectively.

Exports healthy on global demand, led by engineering goods and petroleum products

Exports stood at USD35.5bn in Oct’21, up 42.3% YoY, underscoring strong external demand. Sequentially, exports picked up momentum in Oct’21 (5% MoM) after witnessing flat growth in the previous month. Non-oil exports rose 30.1% YoY (32.9% from Oct’19) to USD30.3bn, reflecting decent global demand. Non-oil exports registered decent growth of 6% sequentially. Commodity groups constituting 66% of exports, grew by petroleum products (232%), Engineering goods (50.7%), gems & jewelry (44%), organic chemicals (41.9%), while pharma, which drove growth during the pandemic, continued to decline in Oct’21 as well (-0.9% YoY).

Imports continue to grow but momentum weakens amid lower oil imports

Imports continued to surge in Oct’21 (62.5% YoY) but moderated from 84.8% YoY in the previous month. Imports witnessed this surge even as the base normalised. Imports were higher than the Oct’19 levels by 46%, signifying the extent of normalization from the pre-pandemic levels. But it is pertinent to note that imports were not able to keep the momentum (-1.8% MoM), and this weakness was mainly due to a 17.3% MoM fall in oil imports. But on a YoY basis, oil imports surged by a massive 140.5%, which may be due to higher crude oil prices and volumes. Gold imports continued to grow at a massive rate of 104% YoY in Oct’21, although it moderated from 750% YoY in Sep’21. Sequentially, gold imports remained flat (-0.2% MoM). NONG imports continued to grow at a healthy rate of 40.1% YoY (35.6% from Oct’19), while sequential momentum remained healthy (6% MoM). NONG imports have been consistently growing for the last eight months at an average rate of 60%. The gain in NONG was led by electronic goods (23% YoY), machinery (42% YoY) and Coal, Coke and Briquettes (119% YoY).

FY22 current account-to-GDP to reverse to deficit of 1.1% amid normalization and oil effect

After the hit to domestic demand post Covid-II, growth seems to have normalized Q2FY22 onward, aided by tailwinds of a smart global recovery and steady vaccination progress. New global headwinds and persistent supply constraints could, however, dent the cyclical global recovery. We raise our FY22 CADto-GDP estimate by 0.3ppt to ~1.1% (USD35bn), assuming Brent at USD71.5/bbl vs. USD66/bbl earlier. We see import growth exceeding export growth, with high losses in oil-led (and high commodities in general) terms of trade implying that the current account-to-GDP will return to a deficit of ~1.1% from a surplus of 0.9% in FY21. We estimate that a USD10/bbl rise in crude oil prices increases India’s CAD by ~USD9bn. Though, healthy capital flows will ensure FY22E BoP surplus of USD48bn (USD87.3bn FY21).

Positive BoP dynamics and RBI’s war chest of FX reserves should ideally help keep a mild upward bias on INR. However, global headwinds and tighter global financial conditions may imply that FPIs ask for a higher EM risk premium, which could pressure EM assets, including India. We note that India’s real rates have been negative and among the lowest in the EM space. Besides, the continued tactical intervention by the RBI will ensure INR remains somewhere in the middle of the EM in terms of spot returns. Overall, INR performance will be caught between mixed external terms of trade, gradually changing global risk environment and RBI’s FX stance. We watch out for any potential news on India’s inclusion in global bond indices in the coming quarters, which could spur debt flows.

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