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Weaker exports widen deficit

* The trade deficit was elevated and sticky, rising to USD23.3bn in Nov’21 (USD19.9bn in Oct’21), largely on account of weaker exports (-16.2% MoM, +26.5% YoY) comparatively imports remained resilient (-4% MoM, +57.2% YoY) amid elevated commodity prices and improving domestic demand. Non-oil non-gold (NONG) imports continued to see healthy 39.9% YoY growth, in line with recent prints.

* For YTD FY22, the trade deficit remained elevated at USD119bn, higher than the pre-pandemic level of USD113bn for the same period in FY20. Both imports and exports have been buoyant, but in the last few months, imports have outperformed exports amid a gradual recovery and elevated commodity prices. Assuming the current oil correction is sustained for the remainder of FY22, merchandise trade could correct but hover close to highs of USD16-18bn ahead amid domestic demand and dragging global supply bottlenecks.

* We expect import growth to exceed export growth, while higher losses in oil-led terms of trade imply that the current account-to-GDP will be in a deficit in FY22. With our revised Brent forecast of USD73.5/bbl, our FY22 CAD-to-GDP estimate is 1.7%, up from ~1.1% earlier. However, healthy capital flows will ensure that FY22E BoP remains in a surplus of USD32bn. We see USD-INR in the 74.50-76 range in the near term.

Trade deficit widens to USD23.3bn in Nov’21

As per the prelim estimates, the merchandise trade deficit widened to a record USD23.3bn in Nov’21 from USD19.9bn in the previous month. Sequentially, exports slumped 16.2% MoM, while imports weakened by 4% MoM. On an annualized basis, exports grew 26.5% (down from 43% in Oct’21), while imports grew 57.2% (62.5% in Oct’21). Against Nov’19, exports and imports grew 15.9% and 38%, respectively, implying that India’s trade is comfortably above the pre-pandemic levels. For YTD FY22, exports and imports continued to clock strong growth of 50.7% (USD262.5bn) and 75.4% (USD384.4bn) YoY, respectively.

Export growth moderates, with sharp decline in sequential momentum

Exports grew by 26.5% YoY to USD29.9bn in Nov’21, lowest in the last nine months. Sequentially, exports contracted 16.2% after registering 5% growth MoM in Oct’21. Oil exports were the lowest in the last seven months at USD3.8bn and sequentially declined 28% MoM. Non-oil exports rose 35.3% YoY (36.1% from Oct’19) to USD29.9bn, reflecting decent global demand, although on a sequential basis it fell 1.4% MoM in Nov’21. Growth in commodity groups, constituting ~60% of exports, was led by petroleum products (145%), Engineering goods (37%), and organic chemicals (32.5%). Meanwhile, pharma, which drove growth during the pandemic, continued to decline in Nov’21 as well (-7% YoY). Gems & jewelry, which constitutes 8% of total exports, fell by 11.1%.

Imports continue to grow but momentum weakens amid lower oil imports

Imports continued to surge in Nov’21 (57.2% YoY), albeit moderating slightly from 62.5% in Oct’21. Imports were higher than the Nov’19 levels by 38%, 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 (-4% MoM). Oil imports surged a massive 132.4% YoY (2% MoM), driven by volume and price effects and also due to improvement in demand with better mobility. Gold imports grew at a healthy rate of 39.7% YoY after witnessing an impressive growth of 104% YoY in Oct’21. Sequentially, gold imports witnessed a sharp decline of 17% MoM. Electronic goods saw a 16% MoM decline. NONG imports continued to grow at a healthy rate of 39.9% YoY (39.8% Nov’19 and average of last eight months ~56%), while sequentially lost momentum (4.4% MoM). The gain in NONG was led by electronic goods (22.3% YoY), machinery (29.3% YoY) and Coal, Coke and Briquettes (135.8% YoY).

FY22 current account-to-GDP revised up to deficit of 1.7% amid normalization and oil effect

After the hit to domestic demand post Covid-II, growth continues to normalize 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 further by 0.6ppt to ~1.7% (USD52bn), assuming Brent at USD73.5/bbl. Assuming current oil levels are sustained for the remainder of FY22, merchandise trade could correct but hover close to highs of USD16-18bn ahead amid domestic demand and dragging global supply bottlenecks. Overall, we see import growth exceeding export growth, with high losses in oil-led (and high commodities in general) terms of trade. We estimate that a USD10/bbl rise in crude oil prices increases India’s CAD by ~USD9.5bn. Though, healthy capital flows will ensure a FY22E BoP surplus of USD32bn (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 amid new virus risk, faster Fed normalization and tighter global financial conditions may imply that FPIs ask for a higher EM risk premium, which could pressure EM assets, including India. Overall, INR performance will be caught between mixed external terms of trade, gradually changing global risk environment and RBI’s FX stance. We will keep an eye on any potential news on India’s inclusion in global bond indices in the coming quarters, which could spur debt flows.

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