July trade deficit narrows as GST led disruption drags imports - Kotak

India's July trade deficit narrowed to US$ 11.4 bn compared to 1QFY18 average of US$ 13.4 bn. The weakness in trade data can be attributed largely to GST led disruptions as was also revealed in other muted activity data for June and July, like IIP and PMIs.

- Exports continued to slow for the fourth consecutive month in July, printing 3.9%yoy, ((-)4.3%m/m). Besides the GST led disruptions, the on-going slowdown in export growth can also be attributed to the strength in INR leading to loss in competitiveness amid stable global demand conditions. Given the rise in oil prices, exports of petroleum products surged 20%yoy. However, non-oil export growth eased 1.8%yoy from 4.5% in June - the slowest growth witnessed in a year. On a sequential basis, non-oil exports contracted 6.5%m/m, fourth consecutive negative reading in a row. The weakness in export weakness was concentrated in gems & jewellery (-25%m/m), textiles (-13%m/m), engineering good (-2%m/m) and pharmaceutical products which remained flat.

- Imports witnessed a bigger hit in July, printing the slowest growth in 6-months at 15.4%yoy, and a sharp sequential contraction of 6.9%m/m. Expectedly, oil imports increased 15%yoy with increasing prices of global oil. Gold imports slowed 95% at US$2.1bn (-14.3%m/m), after a sharp increase witnessed since demonetisation and in the run up to GST. Meanwhile, the core-imports (non-oil, non-gold), a key indicator of domestic demand, slipped 7.3%m/m, registering the slowest annual growth in 5-months (11.6%yoy). Within core sectors, the slowdown was witnessed across the board with capital goods registering (-)9%m/m and electronics growth (-)5%m/m.

Outlook:

The recent trade figures, specifically the slump in imports for July could be a transient phenomenon given the supply chain disruptions led by shift to the new GST regime. This effect is expected to begin fading in the next few months, with imports expected to rebound. However, we are more concerned about the consistent sluggishness in exports which appears more entrenched despite stable global demand. With INR having gained nearly 5% against the USD in CY2017 and REER still seeming to be ~3-4% overvalued compared to its trading partners, exports may continue to be under stress Accordingly, we expect current account deficit (CAD) in FY2018 to widen to US$33.6bn (1.3%of GDP) compared to US$15.3bn (0.7%of GDP) in FY2017. However, the balance of payment (BoP) is still likely to healthily be in surplus at US$27.4bn, helped by robust capital flows.

Despite overall comfortable external sector dynamics, we note that most of the BoP surplus for the year may have already been witnessed, especially given the excessive FPI inflows in the debt segment. Now with limited scope for additional debt inflows amid near full utilisation of debt limits along with the simmering geopolitical tensions we expect financial markets to remain cautious. Further the FX outlook is likely to be marred by tightening global financial conditions. We reiterate our call that INR will gradually drift weaker in rest of FY2018. We expect that USD/INR will remain mostly in the 64-66.25 range in FY2018. However we note that INR may still outperform most of its EM peers, supported by (1) lower external trade dependence, (2) stronger policy and macro fundamentals and (3) a vigilant RBI. But amidst all these contours, RBI's FX intervention and possible enhancement of debt ceilings in the corporate bond segment may become a key driver in shifting the USD/INR range towards 62.50-65.

Source : Equity Bulls

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