Both export and import growth slowed in dollar terms in December, with the former down to 16 per cent (from 27 per cent) and the latter to 18 per cent (from 29 per cent).
The non-oil import growth was 15 per cent, less than half that of November. Both exports and imports are fairly volatile from one month to the next and hence a better idea of the underlying trend is given by looking at the direction of the 3 month moving average of the year-on-year. Interestingly, since the middle of the year, while export growth has strengthened, import growth has softened somewhat.
The dollar numbers are effectively distorted higher up by the rise of the rupee against the dollar (which has amounted to 12 per cent over the last year) and a better way of investigating what is really going on as it impacts Indian companies is to look at the rupee denominated numbers.
The chart shows the 3 month moving average of the year-on-year growth rate in exports and imports. Both series have slowed dramatically from the heights of mid-2006 when export and import growth was running at roughly 40 per cent in rupee terms.
The extent of the weakness in import growth, which is now running close to its lowest level since 2001, is particularly surprising. Although India’s exports have a high import content the risk is that domestic demand is also softening. We can be fairly confident that this is true of consumer demand (both durable and non-durable according to the industrial production statistics) but the real worry would be if capital spending begins to slow.
So far there is no sign of this in the industrial numbers, which extend to November and show still booming production of investment goods, but the latest FICCI survey reported signs of declining confidence in the sector.
This is something that needs to be watched carefully. As a result of the weakness in imports, India’s trade deficit shrunk in December and has shown year-on-year improvements in three of the last four months.
At the same time, the latest WPI numbers edged higher again to 3.9 per cent in the week ended 19th January from 3.8 per cent in the previous week and a low of 3 per cent in November. Base comparisons will soon become more difficult while everybody is waiting for some of the energy price rise to be passed on. Assuming this happens, we still expect the headline WPI rate to be back to roughly 5 per cent by mid-2008.
If this is right and the RBI is also faced with growing evidence of economic slowdown then tough choices will need to be made, particularly with the general election scheduled for 2009.
Our previous call was that the repo rate would be left unchanged throughout 2008, but we changed this in our last India Watch publication to include two 25 bps cuts, following hints from the RBI that it may be shifting towards more of a growth focus. This obviously didn’t translate into rate action this week, but we are happy to stick with the call.
(The author is an economist with HSBC)
The non-oil import growth was 15 per cent, less than half that of November. Both exports and imports are fairly volatile from one month to the next and hence a better idea of the underlying trend is given by looking at the direction of the 3 month moving average of the year-on-year. Interestingly, since the middle of the year, while export growth has strengthened, import growth has softened somewhat.
The dollar numbers are effectively distorted higher up by the rise of the rupee against the dollar (which has amounted to 12 per cent over the last year) and a better way of investigating what is really going on as it impacts Indian companies is to look at the rupee denominated numbers.
The chart shows the 3 month moving average of the year-on-year growth rate in exports and imports. Both series have slowed dramatically from the heights of mid-2006 when export and import growth was running at roughly 40 per cent in rupee terms.
The extent of the weakness in import growth, which is now running close to its lowest level since 2001, is particularly surprising. Although India’s exports have a high import content the risk is that domestic demand is also softening. We can be fairly confident that this is true of consumer demand (both durable and non-durable according to the industrial production statistics) but the real worry would be if capital spending begins to slow.
So far there is no sign of this in the industrial numbers, which extend to November and show still booming production of investment goods, but the latest FICCI survey reported signs of declining confidence in the sector.
This is something that needs to be watched carefully. As a result of the weakness in imports, India’s trade deficit shrunk in December and has shown year-on-year improvements in three of the last four months.
At the same time, the latest WPI numbers edged higher again to 3.9 per cent in the week ended 19th January from 3.8 per cent in the previous week and a low of 3 per cent in November. Base comparisons will soon become more difficult while everybody is waiting for some of the energy price rise to be passed on. Assuming this happens, we still expect the headline WPI rate to be back to roughly 5 per cent by mid-2008.
If this is right and the RBI is also faced with growing evidence of economic slowdown then tough choices will need to be made, particularly with the general election scheduled for 2009.
Our previous call was that the repo rate would be left unchanged throughout 2008, but we changed this in our last India Watch publication to include two 25 bps cuts, following hints from the RBI that it may be shifting towards more of a growth focus. This obviously didn’t translate into rate action this week, but we are happy to stick with the call.
(The author is an economist with HSBC)
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