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India’s robust exports in December notwithstanding, the country is staring at high trade gap numbers in FY22 and FY23 with current account remaining in deficit due to increased imports, an analysis of the trade data released by the government has said.

According to a report by Kotak Institutional Equities (KIE), despite a record pick up in exports this year, the December trade deficit at $22 billion is also only marginally lower than the record highs of September and November.

“Both exports and imports were the highest recorded to date likely on the back of positive price effect, seasonal uptick, and buoyancy in global and domestic demand. We expect the trade deficit to remain high and CAD/GDP at (-)1.7% in both FY2022E and FY2023E with USD-INR in the range of 74-76.5 in the near term," the brokerage said in its report.

The country’s exports in December rose by a record 37% year-on-year to $37.29 billion, government data showed on Monday. This is the highest-ever monthly achievement of exports so far. Imports also increased by 38.06% to $59.27 billion over $42.93 billion in December 2020. Consequently, India's trade deficit last month widened by 39.9% YoY to $21.99 billion.

“We estimate the trade deficit in FY2022E at US$190 billion (against $102 bn in FY2021) and at $200 billion in FY2023E. We pencil in invisibles at $138 billion leading to CAD of $51.9 bn (1.7% of GDP) in FY2022E. For FY2023E, we estimate CAD at US$58.5 bn (1.7% of GDP) at average crude price of US$70/bbl and steady invisibles net receipts," the KIE report said.

For every $10 per barrel increase in average crude price, CAD increases by $17 billion (0.5% of GDP). Furthermore, in FY2023E, the current account is likely to be balanced by strong net capital flow of around $81 bn, of which around 32% can be attributed to FPI flows due to India’s inclusion in the global bond indices.

"We assume an debt FPI inflow of around US$25 bn in FY2023 due to inclusion in bond indices. This provides a healthy BOP surplus of US$22 billion at our base case of crude price of US$70/bbl, the KIE report said.

If crude prices were to average at around $80/bbl, there is only a marginal surplus of US$5 billion available. In case the bond inclusion is delayed, the pressure on the external sector will increase and the RBI’s FX reserves will provide support to the rupee, it added.

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