Dec 16, 2022 Market Briefing ( India Trade Deficit / Fears of recession grow)

  "Believe. Think. Visualize"

India trade deficit* in November improved to $ 24 bn on a 7% mom growth in merchandise exports to $ 32 bn and de-growth of 1% in mom imports to $ 56 bn. Electronic exports rose sharply while textiles, chemicals and other categories showed contraction. The table below shows Apr - Nov actuals and projected numbers for the FY. This will be the largest current account deficit posted by India. 

For Dec - Mar numbers, exports are assumed at $ 30 bn. If the global recession fears materialize on aggressive tightening by Central Banks, the extent of demand destruction in the export basket will need to be closely watched especially since the Indian currency continues to be overvalued. The trade weighed REER index eased from 103.06 to 101.62 in Oct. Assuming a 10% destruction in exports, the export number for balance of the year is estimated at $ 108 bn. On the import side, $ 55 bn of imports per month is assumed. Savings of $ 1 - $1.2 bn are likely to accrue on a 10% reduction in prices of crude oil. Oct crude oil prices averaged b/w $ 92 - $ 93 per barrel and Nov crude oil prices averaged $ 88 per barrel ( for Dec imports). if there is a 20% reduction in crude oil prices, we are looking at $ 6bn of conservative savings on the oil import bill. The above numbers put in perspective how the trade account could worsen. Obviously, this is a very one sided view and other items should be analyzed too but i reckon this gives an estimate.

The current account deficit could be b/w 3.3%-3.60%.

Balance of payment continues to be the major concern for markets.

Current account deficit                     $ 125 bn

FDI                                                    $ 40 bn

FPI                                                    -$16 bn

( until Dec 15, FPI outflows stand at $ 6 bn. With elevated levels on the equity indices and worsening outlook, we could see $ 10 bn of outflows)

Loans / Banking Cap / Others            $ 50 bn

BoP                                                     $ 51 bn

The trade data was better than previous month figures. Global risk sentiment completely deteriorated after US Retail sales data fell 0.60% mom and industrial production fell 0.20%. Surprisingly resilient job numbers made matters worse with continuing claims stable at 1.671 mn and initial claims at 211k (exp 227k). Strong job market could impart stickiness to the inflation data and the Fed could hike more than necessary. Earlier in the morning the data from China had also been disappointing. 50 bps rates hikes were announced in Europe (2.5%), UK (3.5%), Philippine's (5.50%), Switzerland (1.00%), Mexico (10.50%).  ECB also announced balance sheet roll off at the start of march 23 at a monthly pace of $ 15 bn. ECB expects core inflation to remain above 4% next year and above 2% in 2025. That means ECB will have to hike interest rate above 4% to bring inflation down. 

We are looking quite good in terms of the USD long established post FOMC and the forwards trade is doing well. We talked about fading the move into the 82.65 - 82.90 territory and favor selling here with tight stops above 83.30.

That's all for now. Have a good day

*The data has been approximated for ease of synthesizing.