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Seasonally strong month ensured strong sequential gains in trade activity in Dec’23. Imports were comparatively weaker despite seasonality, which aided narrowing in trade deficit to USD 19.8bn. Weakness in imports was mainly due to the price–led fall in crude oil imports, as crude prices declined 7.3% sequentially. The impact of the disruption in the Red sea is likely to reflect in the trade figures of Jan’24. India’s trade with Europe and Africa is substantial as exports form ~35% while imports form ~26% of India’s trade basket. Amidst risk of deterioration, we retain our CAD estimate at 1.4% of GDP for FY24, as the monthly run rate of trade balance is ~USD 20bn.

* Strong exports aided trade balance: Merchandise trade deficit narrowed further to USD 19.8bn in Dec’23 (USD 20.6bn in Nov’23) and was marginally lower than consensus estimates of USD 20bn. Sharp sequential improvement in exports (13.5% MoM) vs imports (6.9% MoM) aided in containing the trade deficit within the USD 20bn mark.

* Imports decline in seasonally strong month: December has historically been a seasonally strong month, but exports in Dec’23 were robust at USD38.45bn with strong sequential gains and a marginal uptick of 1% YoY. Most notable contribution came from Engineering goods (10.2% YoY, 28% MoM), Gems and Jewellery (14.1% YoY, 3% MoM) and Electronic goods (9.3% YoY, 16% MoM) while exports of petroleum products (-17.6% YoY, -8% MoM) dragged overall exports. Imports were comparatively weaker with a 4.9% decline on annual basis, but seasonality ensured robust sequential gains of 6.9% MoM. This decline can be mainly attributable to price-led fall in imports of crude oil (22.8% YoY, 0% MoM), which has the largest weight in the imports basket (wt. 27%). Crude oil prices sequentially declined 7.3% in Dec’23. Imports of electronic goods were robust (48.5% YoY, 45% MoM) while gold imports continued to decline post the festive season (-12% MoM). Although on FYTD basis, overall trade activity remained weak, there is a marginal improvement in trade deficit (Ex 7).

* Disruption in Red sea likely to impact trade activity: Disruption in the Red sea has started to impact trade activity, as altered shipping routes are raising transportation costs. Freight rates have doubled in last fortnight to ~USD 3000/40ft container, moreover altered route through the Cape of Good Hope means a delay of 14-20 days. This has led to exporters either avoiding exports to Europe and Africa and looking for other markets or bearing the additional costs. India’s annual exports to Europe (USD 102bn) and Africa (USD 51bn) forms ~35% of exports basket while imports constitute 26% of India’s imports basket. Initial estimates indicate that exporters are expected to avoid/differ 25% of the exports through the Red sea.

* Weakness in Services trade: Preliminary estimates indicate weakness in overall services trade, the fall in services imports (-16% YoY, -3.1% MoM) was steeper vs services exports (-10.3% YoY, -0.7% MoM). This aided services trade balance to improve marginally in Dec’23 (USD 14.6bn vs US 14.4bn prior). However, it is pertinent to note that preliminary estimates undergo significant revisions.

* Amidst risk of deterioration, we maintain our CAD estimate at 1.4% of GDP: The full impact of the recent disruption in the Red sea is likely to be reflected in the trade numbers of Jan’24. India’s trade with Europe and Africa is substantial as exports form ~35% while imports form ~26% of India’s trade basket. It is events like these which would further impact the already vulnerable global trade activity. But it would be premature to gauge the likely impact on the trade balance. Hence we retain our CAD expectation at 1.4% of GDP for FY24, assuming a monthly trade deficit run rate of USD 20bn will be maintained.

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