August goods trade deficit widened to a ten-month high at $29.7bn, owing to a 9.3% decline in exports whilst imports notched a gain. Slowing petroleum/ oil receipts weighed on both energy exports (-38% yoy) and imports (-32%), besides a sharp jump in gold purchases, outside of which non-oil non-gold exports and imports rose modestly. This effectively translated into a 18% yoy increase in the fiscal year-to-date (FYTD) goods trade deficit, overshadowing persistent surpluses registered by services trade. Consequently, total trade (goods and services) deficit widened by 22% to -$46bn FYTD. The weak trade balance is expected to widen the 2Q24 (1QFY) and 3Q24 (2QFY) current account deficit back above -1.0% of GDP vs average -0.7% last year. Going forward, external trade faces two-way forces, with imports likely to soften on lower oil and soft post-festive gold demand, but exports face the prospect of moderating growth in key trading partners.
The recent trade outrun will cap rupee gains, with the currency already bucking regional trends by maintaining a weakening bias despite a sharp correction in the USD index since August. INR is a marginal -0.8% down vs USD on YTD basis, amongst the regional underperformers, as authorities opt to soak the cumulative $16.5bn portfolio inflows into the debt and equity markets this FY, in turn pushing foreign reserves to a fresh record high of nearly $690bn. Bond markets shook out of stupor, with yields breaking below range in response to a correction in oil prices and stronger USTs. Cancellation of two T-bills this quarter, and lower than expected SDL auction fuelled the OIS moves, with 10Y GSec yield slipping to 6.75-6.78% region, despite lack of outright dovish cues from the central bank. Firmer Aug inflation print and a likelihood of adverse base effects pushing up Sept’s reading put to bed rate cut expectations for October. Asian central banks will watch this week’s US Fed rate decision closely.
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