Trade and Current Account Analysis for July 2023
Mixed Trends in Goods and Services:
In this Blog, we delve into the trade and current account data for July 2023, analysing both goods and services sectors. We also explore the implications for the fiscal year 2024, taking into consideration changing trade dynamics and economic trends. blog sheds light on the widening goods trade deficit, the steadfast services surplus, and their combined impact on the current account deficit.
Goods Trade Deficit Widens, Services Surplus Holds Firm:
The data from July 2023 reveals a widening in the goods trade deficit, reaching US$21 billion, while the services sector maintained a solid surplus of US$12.3 billion. The current account, projected for FY2024, seems set to benefit from a narrowing goods trade deficit coupled with a steady services surplus. However, an interesting development emerges in the relative strength of non-oil imports compared to non-oil exports, prompting us to revise our goods trade deficit estimate upwards. Consequently, the FY2024 current account deficit (CAD)/GDP estimate is adjusted to 1.4%, up from the earlier 1%.
July Exports: Oil Exports Decline, Non-Oil Exports Hold Steady:
July's export figures exhibit a contraction of 16% year-on-year (yoy), amounting to US$32.3 billion (compared to June's US$34.3 billion). This decline can be attributed to a substantial fall in oil exports, which plummeted to US$4.6 billion from June's US$6.8 billion. Non-oil exports, however, experienced only a marginal increase, reaching US$27.7 billion (compared to June's US$27.5 billion). The growth in non-oil exports was primarily bolstered by engineering goods, organic and inorganic chemicals.
This trend is consistent with the performance over the last four months, where engineering goods, gems and jewellery, and chemicals stood out as top exports. The decline in exports since July 2022 can be attributed to lower commodity prices and gradually weakening global demand.
Steady Imports Amidst Oil Fluctuations:
July's imports, amounting to US$52.9 billion, registered a year-on-year (yoy) decline of 17%. Non-oil imports, on the other hand, increased to US$41.2 billion from June's US$40.6 billion. This uptick was offset by lower oil imports, which dropped to US$11.8 billion from June's US$12.5 billion.
The surge in non-oil imports was driven by electronics and machinery, while gold imports saw a sequential contraction. Similar trends were observed in the imports over the last four months, where electronic goods, machinery, coal, coke, briquettes, and gold constituted the primary imports. Consequently, the trade deficit for July expanded to US$20.7 billion from June's US$18.8 billion, while the cumulative trade deficit for the first four months of FY2024 stood at US$77 billion, down from US$88 billion during the same period last year.
Services Sector Moderates, Yet Remains Strong:
July witnessed a moderation in the services sector, with services exports amounting to US$27.2 billion (down from June's US$27.8 billion). Correspondingly, services import also decreased to US$14.9 billion from June's US$15.2 billion.
Despite this moderation, the services surplus remained robust at US$12.3 billion (compared to June's US$12.6 billion). This consistent trend in the services surplus supports our expectation of a firm services surplus estimate of US$145 billion for FY2024.
Revised FY2024 Current Account Deficit Estimate:
Looking ahead to FY2024, we anticipate that the current account will experience relatively modest pressures in comparison to the previous fiscal year. This projection is driven by two main factors: lower global commodity prices leading for a narrower goods trade deficit, and a steady services surplus.
However, a notable development is the relatively stable nature of non-oil imports in contrast to non-oil exports. This shift leads us to revise our goods trade deficit estimate upwards to US$250 billion, resulting in an adjusted FY2024 CAD/GDP estimate of 1.4%, up from the initial projection of 1%. This adjustment brings the balance of payments (BOP) to a neutral position for FY2024.
Exchange Rate Outlook:
In the near term, the Indian Rupee (INR) is expected to face pressure due to various uncertainties. These include the impact of global monetary tightening, a slowdown in China's economy, and rising crude oil prices. However, the Reserve Bank of India's intervention is likely to cap significant volatility. We anticipate the USD-INR exchange rate to remain within the range of 82.50 to 83.50.
Conclusion:
July's trade and current account data depict a mixed landscape, with a widening goods trade deficit offset by a resilient services surplus. The evolving dynamics of non-oil imports and exports contribute to the adjustment of the FY2024 CAD/GDP estimate to 1.4%, with overall BOP expected to remain neutral.
While external factors like global monetary trends, China's economic trajectory, and oil price movements introduce uncertainties, careful intervention by authorities can help stabilize the currency market.
