RBI: Good News for the Indian Import Trade in August 2016

The Ministry of Commerce announced the merchandise trade data for the month of August 2016 and the services trade data for the month of July 2016. The pace of exports has been slackening for the past 18 months, although the export figure seems to have bottomed out. Imports continue to fall on the back of weak commodity prices, pressure on oil prices and falling gold imports. Here are some of the key takeaways from the trade numbers…

Exports and Imports largely along expected lines…

Merchandise exports for the month of August 2016 came in at $21.52 billion which is marginally down by (-0.30%) compared to the corresponding period last year. Actually, it was non-petroleum exports that showed a growth of 1.79% at $19.1 billion for the month. While India faced negative exports growth to the US, EU and China, there was an 8.7% growth in exports to Japan, which could be largely explained by the weakness of the INR vis-à-vis the Japanese Yen.

Merchandise imports for the month of August 2016 stood at $29.19 billion, a fall of 14.09% over the corresponding period last year. The sharp fall in the monthly import bill can be largely attributed to weak oil prices, which has continued to stay below the $50 mark as US stockpiles have been inching closer to the 550 million barrels mark. Interestingly, the oil imports for the month of August fell by just about 8.47% over last year whereas non-oil imports fell 15.7% over last year on the back of a sharp fall in gold imports, which fell sharply by over 70% on a YOY basis.

Balance on merchandise and services trade…

The merchandise trade deficit for the month of August 2016 is at $7.67 billion, which can be annualized into an annual merchandise trade deficit of approximately $90 billion. In absolute dollar terms, the annual trade deficit has come down by nearly $100 billion since 2012, which has resulted in a huge transfer of wealth from the oil producing nations to oil consuming nations like India. At the currently level of estimated annual trade deficit of $90 billion, the forex reserve position is sufficient to meet the merchandise deficit more than 4 times. Also, with the annual import bill coming in at around $375 billion, the current forex reserve positions is almost sufficient to cover 12 months of imports.

On the services side, the usual surplus continues. Services exports for the month of August stood at $12.78 billion while service imports stood at $7.41 billion. This has resulted in a services trade surplus of $5.37 billion. That still leaves a net trade deficit of around $2.3 billion after adjusting the services surplus against the merchandise deficit. Of course, one can argue that the merchandise data pertains to August and the services data to July, but the trends are broadly indicative and reliable. For the first 5 months of the current fiscal (Apr-Aug) 2016, the merchandise trade deficit stood at $34.67 billion.

What does the trade data mean for the rupee?

On the day the trade data was announced the INR was rattled in early trades after a meeting was scheduled with the Commerce Ministry on the rupee value. In REER terms, the Indian rupee is already overvalued and there is a constant demand from the exporters to let the rupee depreciate and find its actual level. What the August trade data indicates is that exports from India have failed to pick up and the only beneficiary has been the trade with Japan which has benefitted due to INR weakness versus the Yen. While the narrowing trade deficit and comfortable forex position will surely keep the rating agencies in good humour, the real worry will continue to be on the exports front.

It is believed, and rightly so, that a lot of the current trade related advantages may vanish if the price of crude oil crosses $60/bbl. That may become eminently possible if the OPEC nations and Russia are able to agree upon oil output quotas. The onus will be on the Finance Ministry and the RBI to let the INR depreciate and find its level. There is $22 billion redemption of FCNR (B) bonds that is coming up between September and November this year which will definitely put pressure on the rupee. The government may be inclined to not intervene in the forex markets and let the INR depreciate and find its real value. The INR equation with the dollar may be the key metrics to watch out for.

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