India’s rare trade surplus is expected to continue supporting the rupee
During June, merchandise exports contracted 12.4% while imports dipped 47.6%
For the first time since 2002, India’s merchandise trade balance turned to a surplus of $0.8 billion in June. While imports continued to decline at a faster pace, the contraction in exports ebbed.
Considering the size of stimulus packages and faster reopening of global economies, India’s exports should benefit. On the other hand, declining imports, an indicator of poor domestic demand, are unlikely to see any immediate improvement. Regional lockdowns in some Indian states, along with an uncertain employment scenario, will keep consumption-related imports subdued.
Net-net, economists expect India to enjoy a modest trade surplus, albeit temporarily.
In a note published on 15 July, Teresa John, economist at Nirmal Bang Securities Ltd, said trade surpluses in India have usually not lasted more than a month. But going by the trade surplus in June, India is headed for a second straight quarter of current account surplus for the first quarter of fiscal year 2021.
And this would provide some support to the Indian rupee, the note said. Current account balances represent the net of the country’s exports and imports of goods and services. It also takes into consideration the payments made to foreign investors or inflows from them. So, a positive trade balance would translate into a better current account balance.
In the January-March quarter of FY20, the current account balance recorded a marginal surplus of $0.6 billion, or about 0.1% of its gross domestic product. This was the first quarterly surplus in 13 years and compares with a deficit of $4.6 billion for the year-ago period. For 2019-20, the current account deficit narrowed to 0.9% of the gross domestic product (GDP) compared to 2.1% in the financial year 2018-19.
“With oil prices likely to remain stable in the current range (average crude oil price of $40/barrel), we expect FY2021 current account to register a surplus of 0.6% of GDP. Meanwhile, the capital account balance may moderate in FY2021 owing to the volatile FPI flows. Factoring this, we expect FY2021E balance of payments to stay hugely in surplus at $59.4 billion,” Kotak Institutional Equities (KIE) economists said in a report dated 15 July. KIE sees the Indian rupee trading in the 74-77.5 range for the rest of FY21.
“Despite a huge surplus, we expect the RBI to intervene aggressively to avoid a sharp INR appreciation. The INR outlook will also be shaped by extent of global liquidity, US-China trade disputes, India’s border issues and the spread of covid,” the report added. The Indian rupee is currently trading at 75.12/$.
Coming back to trade data, during June, merchandise exports contracted 12.4%, while imports dipped 47.6%.
Economists do not expect an immediate revival in imports of gold and electronics, given the high prices and uncertainty surrounding income growth, respectively.
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