$70bn CAD possible but falling CV sales worrying
A 13% export growth for August, on top of a 12% one for July is good news from the point of view of the beleaguered current account deficit, even though it has to be kept in mind that the $300 million hike in August exports over the July ones is minuscule, and the July and August growth has to be seen in the context of a negative export growth in both months in 2012. Given the moderate August growth comes even after the rupee depreciated 13% over the last 12 months, this suggests exports are going to take a lot longer to respond. Non-oil imports, however, have compressed much faster—for August, the compression of 10.4% was almost double the 5.3% compression in July, though a large part of the cut was due to the collapse in gold imports, from 47.5 tonnes in July to 2.5 in August. Some part of this will now revive with the festive season coming and keep in mind the confusion over gold import rules also cut into imports. In overall terms, however, with a sub-$11 billion trade deficit number for August, down from $12-billion-plus in the two previous months and around $19 billion in the two months before that from April to May, this means the finance minister’s $70 billion CAD target for FY14 looks likely once you take into account $5 billion worth of net services exports and $2-3 billion of remittances each month.
In which case, it is critical that capital flows staunch as they have since the beginning of the month. In the first half of August, when FIIs withdrew $628 million from the debt and equity markets, the rupee fell from 60.37 to the dollar to 61.44; when this number almost trebled to $1.8 billion in the second half of August, the rupee collapsed to 66.6, even crossing 68 on one day. With $424 million coming in till September 6, the rupee recovered to 63.95. In other words, the market remains quite thin, despite oil-PSUs being given a separate non-market window by RBI. In which case, RBI Governor needs to reverse many of the steps taken during the last month and provide more depth to the market. While the automobile data shows a positive 4.5% sales growth in August, the steeper 23% contraction in commercial vehicle sales—since January, they were positive in just one month, at 0.8% in April—indicates that the economy is far from bottoming out, something the sub-50 PMI also indicated a few weeks ago. Given how the month has 3 major events, the sudden strengthening of the rupee shouldn’t be taken for granted. The possible fallout of a US strike on Syria is unclear, a lot depends on how much the Fed decides to taper later next week and were Angela Merkel to come back with a reduced number of seats in Germany, the recovery in Europe—which is where the bulk of India’s trade credit comes from—is certain to take a hit. In other words, prepare for choppy weather in the weeks ahead. While this means the government has to fast forward its reforms measures to keep FII equity holders engaged, it also means RBI must continue to try and deepen markets, not try and curb them as has been the policy over the past few months.