External Challenges Could Increase As Trade Deficit Widens: Emkay Global

Going ahead, external sector challenges could increase and import growth exceeding export growth, while higher losses in oil-led terms of trade imply a CAD-to-GDP ratio of 1.7% in FY22E, Emkay Global has said.

"With oil sustaining above USD100/bbl and other commodity pressures remaining intact, the CAD-to-GDP ratio may comfortably touch 3.0% of GDP in FY23E. The capital account also remains tricky, implying that the BoP may get back to a deep deficit of US$45-50bn in FY23E after US$40bn+ in FY22E," the brokerage has said.

The trade deficit widened to near-highs of USD23.3bn in May, with exports (-7.2% MoM) falling and imports (0.5) rising slightly on a sequential basis. However, both core exports and core imports moderated, showing signs of easing global and domestic demand. Exports have remained resilient in general, led by strong shipments of engineering, electronic goods, petro products, and textiles.

"Gold imports rose on marriage-related demand after easing in the last two months. The energy pinch was visible again. While oil imports rose further, supply shortages and rising power demand led to a surge in coal imports to USD5.3bn in May vs. average imports of USD2.6bn in FY22, reminiscent of the 2011 energy shocks. We believe the power sector shortage could extend for a few more months before easing in H2FY23," Emkay Global has said.

Apart from a deep CAD, global geopolitical risk reassessment, a weaker China growth perspective and tighter global financial conditions should push FPIs to ask for a higher EM risk premium, including in India. Overall, the INR's performance will be caught between worsening external terms of trade, a gradually changing global risk environment and the RBI's FX stance. We see USD-INR in the range of 77-78.50 in the near term.