While exports are not along the lines hoped for, base effects played a large role in the September numbers. But, the exchange rate, by itself, can do little
The main argument of proponents of non-intervention in foreign exchange markets in the face of a rapid depreciation of the rupee is that the currency acts as an equilibrating mechanism to shrink India’s current account deficit. The merchandise trade data for September 2018 was probably the first empirical test for the hypothesis. As a summary, if only a narrow one, the metric of the exchange rate—the USD-INR rate—fell from an average 67.0 during April-June to 68.7 in July, 69.6 in August to 72.3 in September. Although it is still early days yet—factoring in of lags in trade pricing contracts and transactions invoicing—evidence of trade elasticities responding to the depreciating currency should have begun to show up.
In the first sign of a response of India’s trade to the depreciated rupee (INR), the merchandise trade deficit narrowed sharply to $14 billion in September 2018, down from an average $17 billion over May-August. However, the $3.4 billion cut in the deficit was almost entirely due to lower imports, with exports barely creeping up by $100 million. The $3.3 billion lower imports was mainly to a drop in machinery and transport equipment ($1.3 billion), crude and petro products ($0.9 billion) and coal ($0.5 billion). There is some uncertainty about how much the lower industrial imports might be a sign of slowing demand, but domestic sales suggest that it might be a factor.
While exports in September contracted 2.2%, this might not be an accurate metric of a business response to the currency, being largely because of the base effect of the sharp spike in export growth in September 2017 that was probably the result of a one-time adjustment to pent up demand, post the frictions generated before and just after the transition to GST. This said, export by value remained at the $28 billion monthly level in September, about the same as the average $27.5 billion during the four previous months. In terms of the composition, the approximately $1 billion rise in petro products and gems and jewellery over August 2018 was offset by a drop in exports of engineering goods and textiles.
What stands out in a longer term perspective on contributors to the trade deficit is the sharp rise in the petro group deficit over the past 6-7 months, which had shrunk in September 2018. Indeed, there are now signs that demand for diesel, petrol, kerosene and other products has come off in response to the rise in outlet prices. The gold-related deficit, while lower than in FY18, has remained quite stable over the months in FY19.
As an aside, services trade (with data available till August) also does not seem to have responded much. Exports, imports and the surplus have remained rock steady at $16.5 billion, $10.5 billion and $6 billion per month, respectively, since December 2017.
Taking a more granular view on merchandise trade over the years, imports in FY18 (at $466 billion) had already crossed the FY14, FY15 levels of $450 billion, while exports at $ 303 billion were still short. Exports during April-September FY19 were 12% higher than the corresponding period last year, while imports were up 17%. While the growth rates are likely to converge over H2FY19, our projections for the full FY19 suggest that this gap will only increase, unless there is a sharp expansion of exports.
While it might be early days yet to take a call on the response of trade to the rupee, a look at trends in the accompanying graphic provides a perspective. The trends suggest that, over FY18 and FYtd19, import growth has been flat, but export growth seems to have trended marginally lower.
This, unfortunately, is in a global environment where trade had actually improved in value terms, although mostly due to higher prices, while volumes have crept slightly lower. This narrative is also corroborated by trends in shipping prices (the Baltic indices, where the trend of falling shipping rates over the past decade, even adjusted for excess shipping capacities) had reversed since September 2016. Global trade metrics, though only available till July 2018, indicate that emerging Asia trade volumes had risen 4.8% month on month; India’s trade value was down 3%.
Based on current readings of export dynamics (which might change), our current account deficit (CAD) estimate for FY19 still remains at 2.7% of GDP, with the expected deficit compression offset by a shrinking GDP (in USD terms). This is based on our assumption of average Brent crude in FY19 at $77/bbl (actual price in H1 was $74/bbl).
The Purchasing Managers Index (PMI) survey responses show a steady rise in export orders (and this is corroborated by channel checks), and the cost of financing receivables due to delays in credit of GST taxes are also now reported to have mitigated. However, studies by think tanks and our own research suggests that the exchange rate alone does very little of the heavy lifting of trade adjustment. The government and other authorities have already initiated measures, but more effective structural measures are needed as an ongoing process to increase India’s competitive efficiency.

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