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Oil bill widens the deficit to a historic high

* The Sep’21 trade deficit jumped to a historic high of USD22.9bn from USD13.87bn in Aug’21, led by a 50% MoM gain in oil imports. Non-oil non-gold (NONG) imports also surged 18% (highest since May’20 after Covid-19). Gold imports lost sheen, while imports of electronic goods, machinery, and vegetable oils saw a sharp sequential increase. Exports remained flat MoM.

* For YTD FY22 (Apr-Sep’21), the trade deficit stood at USD78.8bn, slightly lower than prepandemic levels of USD88.9bn for the same period in FY20. Compared with pre-pandemic levels (YTD FY20), imports are now higher by 11.5% in YTD FY22, while exports are higher by 23.84%.

* 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/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 widens to highs of USD22.94bn in Sep’21

As per the prelim estimates, the merchandise trade deficit widened sharply to USD22.94bn in Sep’21 from USD13.81bn in the previous month, due to a surge in imports – mainly oil, but even NONG imports also contributed. The last time such a large increase was seen in NONG imports was in May’20 after the first Covid wave. Sequentially, imports surged 19.7% MoM but exports remained flat (0.5% MoM). On an annualized basis, exports and imports grew 21.3% and 84.7%, respectively. Against Sep’19, exports grew 28.5% and imports grew 49.6%. For YTD FY22, exports and imports clocked strong performance, growing by 56.9% (USD197.1bn) and 82.4% (USD275.9bn) YoY, respectively.

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

Exports stood at USD33.4bn in Sep’21, up 21.4% YoY, underscoring strong eternal demand. However, they remained flat sequentially (0.5% MoM). Non-oil exports rose 18.7% YoY (26.3% from Sep’19) to USD28.5bn, reflecting decent global demand. Sequentially, non-oil exports witnessed a mild contraction of 0.4% MoM. Commodity groups constituting 60% of exports, grew by Engineering goods (36.7%), petroleum products (39.3%), organic chemicals (29.6%), gems & jewelry (19.7%), while pharma, which drove growth during the pandemic, witnessed a decline of 8.5% on YoY basis.

Uptick in imports led by Oil, but core imports show massive gains sequentially

Imports jumped 84.7% YoY in Sep’21 even as the base normalized. Imports were higher than the Sep’19 levels by 50%, signifying the extent of normalization from the pre-pandemic levels. Sequential momentum in imports was strong at 19.7% MoM, mainly driven by oil imports (49.6% MoM and massive 199% YoY). The jump in oil imports reflects both higher crude oil prices and volumes. Gold imports grew at an exorbitant rate of 751% YoY but sequentially lost momentum by 24% MoM. NONG imports grew by a whopping 40.5% YoY (23.8% from Sep’19) and picked up pace on a sequential basis (18% MoM). The gain in NONG was led by electronic goods (17.3% YoY, 16.4% MoM), machinery (42% YoY, 9.6% MoM) and vegetable oils (134% YoY, 50% MoM).

FY22 current account/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 onwards, aided by tailwinds of smart global recovery and steady vaccination progress. New global headwinds and persistent supply constraints could, however, dent the cyclical global recovery.

We revise our FY22 CAD/GDP estimate higher 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, which could spur debt flows.

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