The monthly trade data announced on Tuesday continued to raise the spectre of falling exports. In fact exports fell for the 12th month in succession, largely driven by a contraction in demand globally as well as a fairly strong rupee. Remember, in the last one year, most emerging market currencies across Asia and Latin America have depreciated sharply against the dollar. In contrast, the Indian rupee has only seen a calibrated depreciation versus the dollar. This strength of the rupee has also contributed to the tepid performance on the export front. As per recent Real Effective Exchange Rate (REER) studies, the Indian rupee is overvalued by nearly 13-16% in the current macroeconomic scenario.
The RBI currently has a two pronged role. In order to keep the FII money flowing into debt and equities, the RBI needs to ensure that yields on debt are attractive. Currently, the spread of a 10-year Indian G-Sec yield is around 5.5% above the US 10-year G-Sec yield. This is almost 120 basis points higher than the average spread between India and the US. This spread ensures that FPI inflows into debt continue. This creates a piquant situation. The rupee fall has to be calibrated to ensure that FPI flows keep coming in. At the same time a strong rupee is making the Indian exports weaker in the current tepid global scenario. It is in this background that the trade data for the month of November 2015 needs to be understood.
Export growth continues to disappoint…
Exports for the month of November fell by 24.5% to $20 billion on a year-on-year basis. This is the 12th successive month of fall in exports. This indicates that for the full financial year, India’s exports are likely to show a sharp fall of over 20% compared to the previous financial year. Within the export basket, petroleum, iron ore, oilseeds, rice and cereals posted the steepest declines on a year-on-year basis. Even in case of products like tea, jute and pharmaceuticals, the pace of growth has clearly slowed down. Ironically, at a time when India’s GDP growth is likely to touch 8%, exports will end the financial year 2015-16 at below $300 billion. This will be the lowest recorded export figure in the last 5 years.
One needs to remember that this fall in exports has a volume effect as well as a price effect. Volumes are down because economies like China, Japan and the EU are seeing growth petering to record lows which is impacting demand. At the same time there is also a strong price effect as crude oil and other industrial commodities have seen a sharp fall in the last one year.
Imports were weak but gold continues to be the worry…
Like in case of exports, the import fall also had a volume and price effect to it. Volumes were down because of weak global activity and weak local demand. There was also a price effect as the key item in the import basket, Crude Oil, continued to quote at 7-year lows. Imports for the month of November 2015 were down by 30.2% at $29.8 billion. It was not just crude but also other non-oil items that showed a sharp fall in imports. Coal, mineral ores, fertilizers and chemicals were all down between 20-60% and that is not great news for the much touted revival of the capital cycle.
The worry, of course, is that gold imports continue to be strong despite the best efforts of the government to curb gold imports. At $3.5 billion in November, gold continues to be a major drain on the national currency reserve. The government has been trying various gold monetization schemes to ensure that the stashed gold comes into the market and reduces the pressure on gold imports. But such schemes have met with limited success due to the entrenched mindsets of Indians. Rising gold imports could be attributed to the festival season demand but it poses a major challenge for the government. This is because precious forex reserves tend to get frittered away in paying for an unproductive asset like gold. That is an area the government needs to keenly focus on.
Trade deficit and implications for the rupee…
One of the redeeming features in the entire trade contraction period is that the monthly trade deficit for the month of November has been contained at $9.8 billion. For the first 8 months, the trade deficit is in the range of $71 billion and we may end the year with a trade deficit of around $115-118 billion. With the current account deficit likely to be contained at less than 1.5% of GDP, these numbers are unlikely to exert an overt influence on the value of the rupee. One more positive aspect of this trade contraction has been the forex coverage. The foreign currency reserves which were sufficient to cover 7-8 months of imports are now sufficient to cover nearly 10-11 months of merchandise imports. That gives a major room for comfort as far as the RBI is concerned.
On the topic of the rupee, it needs to be remembered that today the value of the rupee is not impacted by trade statistics as much as by the flow of FPI and FDI. While FPI in debt continues to be strong, the FDI figure is picking up rapidly. Programs like “Make in India” are likely to make the FDI flow stronger. Hence, while the fall in overall trade is surely a worry, it is unlikely to exert any negative impact on the Indian Rupee. That is the good news!
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