Meanwhile, imports continue to rise. More gold is being brought into the country and, while the pre-GST stocking by jewellers ahead of the July 1 rollout was not surprising, gold imports have risen fairly sharply both in July and August.
The trade data for July and August have been encouraging with some of the GST-related disruption in July having been reversed in August. For instance, exports in August rose in double-digits—10.3% y-o-y, sharply higher than the 3.9% y-o-y in July.
Nevertheless, the trade deficits, even if they are smaller, remain elevated. There is also the concern that inflows from remittances have risen very marginally in Q1FY18, against the backdrop of not growing meaningfully for some two years now. As such, although invisible surpluses increased nearly 15% y-o-y, in the June quarter, reflecting the better global demand, foreign receipts from travel, construction and other business services, these were not enough to offset the higher trade deficit. Also, a good chunk of the strong portfolio flows in Q1, of $11 billion, was contributed by inflows into the bond markets; with much of the quotas for foreign funds nearly full up, these could taper off.
Unless the fund flows into the stock markets compensate for this, the total capital flows could be smaller in subsequent quarters.
However, at this point capital flows are less of a concern that the subdued increase in exports. As core imports rise—as they should if the economy picks up steam—exports need to grow to keep the trade deficit in check.
For now, the CAD it would appear can be reined in at about $37 billion, or a comfortable1.5% of GDP in FY18.
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