Credit Suisse sees suprisingly high trade deficit in April as an exception than a trend and sees May trade deficit at USD 15 billion.
Trade deficit in April came much higher than market expectation at USD 17.8 billion, however Robert Prior-Wandesforde of Credit Suisse believes that this number is an exception and not necessarily a trend.
“It does not necessarily reverse the improving trend we have seen in the three or four months. We have seen two or three months of better numbers. I would not be panicking on the back of it,” Wandesforde said.
He however stressed that April trade deficit will further reduces chance of a interest cut in June by Reserve Bank of India, which has already indicated its cautious stance.
Rush for gold following severe correction in yellow metal price could have resulted in sudden rise in imports. Wandesforde believes that demand for gold is very elastic and sensitive to price. “I think the demand is going to slow as dramatically as it picked up probably in May. So I think we will get a better number there,” he said.
He expects May trade deficit to come at around USD 15 billion.
Below is the verbatim transcript of the interview
Q: This is almost an USD 18 billion trade deficit - USD 17.8 billion to be precise. What is worse, imports which were actually stable or falling have risen by 11 percent and large part of it appears to have been contributed by gold. Your first thoughts on the USD 17.8 billion trade deficit?
A: It certainly is disappointing. I was looking for about USD 13-13.5 billion. Both exports and imports were a surprise, weakness of exports and strength of imports. It does not necessarily reverse the improving trend we have seen in the three or four months. We have seen two or three months of better numbers. I would not be panicking on the back of it.
Q: Where would your solace or equanimity come from? Do you expect exports to do better? Do you think that gold imports are just picking up in a kneejerk reaction to the fall in gold prices? Where is your confidence stemming that this would be one-off?
A: On the export side certainly the work I have done suggests that the rupee depreciation does take a long time to come through. It is coming through. At least the number is positive, for last several months it was negative. So the trend there is still improving. On the import side I have not seen the details to be honest if this is because of gold. We know that the price fall led to a huge surge in demand for gold. I am surprised that it seemingly more than offset the impact of the price decline, but I would imagine that we have temporarily seen a demand, it would settle down again.
Q: This does not change your FY14 Current Account Deficit (CAD) expectations? Do you think April is a one-off?
A: Yes, I think largely. More importantly this will have a bearing on the Reserve Bank of India (RBI). The RBI is clearly going watching these sort of numbers very closely. It has clearly put a lot of emphasis on the CAD and modification in the trade figures. They do want to see an improvement and this number does not signal that. So it will throw some doubt on it. RBI is a cautious institution. I think it further reduces the chances of an interest rate cut at the June meeting, I certainly was not expecting that anyway, but this at the margin further reduces that chance.
Q4: We just got a good Consumer Price Index (CPI) number. 9.4 percent is not good per se, but it was better than the 10.4 percent that the CPI reported last month. What did you make of that number? Is that changing the trajectory for the better? Do you have any forecast on CPI for the full year?
A: It was a downside surprise. We estimated 9.5 percent. It was slightly lower than us. It is still extremely elevated. The RBI is not going to be popping the champagne corks on this one. RBI would like to see CPI coming down to probably 7 percent before it can relax a little bit more. We should get a good Wholesale Price Index (WPI) number tomorrow, clearly sub-6 percent, but I still sense that we need this trade deficit, this current account position to improve as well.
5: What would be your near term trajectory of the rupee? Would it travel to 56 and then recede or do you think it doesn’t get there at all?
A: We think it does get there. Maybe not in the next three months. That's the view of our foreign exchange analysts. But they do expect a trend of weakness from here. They are not particularly optimistic largely because it is, as you say quite rightly, a lot of money to find every month. We need a lot of news every month to keep this currency appreciating. That it seems to me is going to be a struggle. We were looking in 12 months time for the rupee to be 56.50.
Q: When crude and gold prices fell a few weeks back the Street got very excited on hopes of the improving external situation, decline in CAD. You do not get a sense looking at this USD 18 billion trade deficit that perhaps the Street is a little too overly optimistic on the external situation?
A: Based on this number, that is right. The question is whether this is replicated in the next two or three months. We saw pretty significant improvement in February and March. Is that the new trend or is the April number been the new trend? My suspicion is that the February and March numbers will be the new trend. We are still on an improving trajectory. Frankly the RBI is not going to take that risk. It needs to see the hard data.
Q: When would you expect this craze for gold to go away. Initial first fall always brings buyers back or investors back but in your analysis or your forecast of current account, are you factoring in a trend that after an initial knee jerk buying of gold, people will give up the craze?
A: Certainly what we have done suggest that demand for gold is very elastic, is very sensitive to the price. Since this drop in April, we have seen stabilisation if not a small pick up. I think the demand is going to slow as dramatically as it picked up probably in May. So I think we will get a better number there.
Q: What is your expectation for May trade deficit?
A: I would be looking probably in the order of USD 15 billion or so, so a small Y-o-Y improvement. I will need to look into little bit more detail to see whether that is still relevant.
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