Economists said that while narrower-than-expected merchandise trade deficit print augurs well for the current account deficit for Q2 FY2024, crude oil price volatility amidst geo-political tensions remains a risk to the CAD outlook for H2 FY2024.
Economists said that India’s merchandise trade deficit for the month of September 2023 stood at a 5-month low of $19.37 billion from $24.16 billion in August, primarily due to a reduction in merchandise imports and an enhanced service surplus. Trade deficit in September 2022 was $26.72 billion. According to a Reuters poll, September’s trade deficit was expected to be $23.25 billion.
India’s merchandise exports saw a fall of 2.6 percent year on year, contracting to $34.47 billion in September. The fall was also significantly reflected in imports, which contracted by 15 percent to $53.84 billion in September 2023 against September 2022.
“India’s merchandise trade deficit compressed considerably to $19.4 billion in September 2023 from $28.0 billion in the year-ago month, with a sharp contraction in imports reflecting the impact of lower commodity prices,” said Aditi Nayar, Chief Economist, Head – Research and Outreach, ICRA Ltd.
Amnish Aggarwal – Head of Research, Prabhudas Lilladher Pvt Ltd, added, “India’s trade deficit narrowed to $19.4 billion from $24.2 billion in August, primarily due to a reduction in merchandise imports and an enhanced services surplus. Despite both exports and imports contracting annually, the deficit eased due to a relatively lower contraction in exports vis-à-vis imports. Only a third of key export commodities expanded, reflecting global economic deceleration, though electronic goods thrived under the Government’s PLI scheme.”
Challenges ahead
Economists said that while narrower-than-expected merchandise trade deficit print augurs well for the current account deficit for Q2 FY2024, crude oil price volatility amidst geo-political tensions remains a risk to the CAD outlook for H2 FY2024.
“The September goods trade deficit narrowed to $19.4 bn, led by a sharp fall in non-oil imports. Services surplus increased to $14.5 bn. We maintain our FY2024 CAD/GDP estimate at 1.5 per cent. Risks to the external sector have increased, amid rising geopolitical tensions and global rates expected to stay higher for longer. We continue to expect the USD-INR to trade in the range of 82.75-83.50 over the near term,” said Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities.
Kotak Institutional Equities sees increasing external sector risks from (1) the intensification of geopolitical conflicts impacting oil prices and (2) US policy rates staying higher for longer, aiding US$ strength.
The current merchandise trade deficit trajectory, experts opined, suggests potential challenges ahead, given rising global commodity prices influenced by the robust US economy, geopolitical factors, and Chinese policy stimulus. “The World Bank predicts a global economic slowdown and reduced commodity prices, potentially impacting India’s exports. Concurrently, India’s anticipated GDP growth moderation might reduce imports. On the currency front, the Rupee, nearing its record high against the USD, faces pressures from geopolitical tensions, commodity price volatility, and diminishing advantages from Russian imports. With the USD strengthening and emerging market currencies faltering, especially given China’s economic concerns, the Rupee might experience further depreciation,” said Amnish Aggarwal, Head of Research, Prabhudas Lilladher Pvt Ltd.
Source:indianexpress.com