Overview

• After starting 2017 on a strong footing, India’s exports have slowed down in the past three months. Merchandise exports grew 4.4% on-year in June, compared with 8.3% in May. While growth in imports slowed, it was still faster than growth in exports. Imports grew 19% on-year in June, compared with 33.1% in the previous month.
  
• Declining oil prices was a major factor behind the moderation in the growth of both exports and imports. Oil prices averaged $46.4 per barrel in June, the lowest in seven months. Growth in oil exports plunged to 3.6% from 24.9% in May, while growth in imports slid to 12% from 29.5% in May.
• Growth in exports of non-oil goods also declined, to 4.5% from 6.6% in May. The deceleration was broad-based with 15 out of 30 top export commodities witnessing negative growth. A strong rupee may have hurt India’s export competitiveness. The real effective exchange rate (REER), measuring the rupee’s value relative to the currencies of India’s six largest trading partners, increased 6.5% in June.
• The trend of imports growing faster than exports is expected to continue this fiscal, as domestic demand strengthens. Normal monsoon and payouts to government employees as per the Seventh Pay Commission recommendations, are expected to boost consumption in fiscal 2018. However, the global economy is only recovering gradually, which could mean only a moderate growth in India’s exports. Due to a wider trade deficit, we expect India’s current account deficit to rise a bit to 1% of GDP in fiscal 2018 from 0.7% in fiscal 2017.