Here's why India's export growth is facing huge headwinds
Indian currency losing ground.
According to DBS, weak show in the overnight US markets after the Fed trimmed bond buys further, is likely to weigh on the Indian counterparts today.
Here's more:
The Indian currency might lose modest ground albeit significant weakness is unlikely as the authorities maintain a proactive presence and have signalled intent to curb speculative interests. After trading steadily since Jan14, the rupee briefly appreciated towards 60.80 earlier this month.
This triggered calls for the central back to limit the pace of gains, highlighting potential loss of competitiveness to the exporting community and other sensitive business sectors. These concerns coincided with the release of the Feb14 export growth which declined 4% YoY, after stabilising at single low digits since Nov13.
While the currency helped to boost exports at the margin between Jul-Oct13, the exporting community was understandably unable to bank on the currency for long, as contracts are routinely re-priced to factor in the benefits from a falling rupee.
Moreover our in-house view is also for limited upside in the currency as the authorities remain keen to build the economy’s FX reserves. The weekly data corroborates this view as by early-Mar14, the reserves stock is back at early 2013 high. In addition, the central bank has also been a net buyer in the spot market to soak up excess dollar inflows in recent months.
Besides the currency, favourable base effects and trends in global imports were also dominant drivers of export growth in late-2013.
More recently, however there are indications that regional exports face a soft patch as weather-related disruptions rein in demand from the US and Eurozone is only gradually looking up. Export numbers from China also disappointed in Jan and Feb14, leaving aside the seasonal impact from the annual festive period.
Further headwinds are in store as India graduated from the list of European Union’s Generalised Scheme of Preferences (GSP) earlier this year. In essence, goods originating from India will no longer receive preferential duty rates and instead be subject to higher normal duties.
While this could be deferred if a free trade pact with the European Union had been established last year, the bilateral negotiations has not reached the desired end as yet. As of FY12/13, a third of India’s exports head to the European Union with the increase in duties likely to erode the exporters’ margins and/or slow exports to the economy.
While we hold that bulk of the correction in the trade deficit (current account by extension) has been on account of easing non-oil non-gold imports, a concurrent easing in exports could slow the process. That said, the impact will be more relevant in the next fiscal year, with FY13/14 CAD expected to narrow close to -2% of GDP, halving from -4.7% the year before.