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Increased forex reserves a reason for cheer but trade deficit still the real concern

India's forex reserve touched a high of US$642.45 billion for the week ending September 3, 2021. However, the preliminary trade data for August seeks a certain amount of caution

Increased forex reserves a reason for cheer but trade deficit still the real concern
Increased forex reserves a reason for cheer but trade deficit still the real concern
outlookindia.com
2021-09-11T20:27:25+05:30

As per the latest RBI data, forex reserves in India rose by approx US$8.90 billion on a week-over-week basis to touch US$642.45 billion as of week ending September 3, 2021. Gold reserves went up by $642 million to touch approximate US$38.1 billion for the same period. The data added that India's reserve position in the IMF too increased by US$11 million to touch $5.12 billion. 

While this does trigger optimism about the overall macroeconomic situation of the country- a closer look at the data calls for certain amount of caution. The commodity and merchandise market have the potential to play spoilsport. 

Preliminary trade data not very promising

As per the preliminary data available for August 2021, the commodity and merchandise trade do not project the same picture. Overall exports rose for August on a year-over-year (YoY) basis rose 45.17% to US$33.14 billion whereas the imports rose by approx 51.5%. Particularly concerning here was gold. Import for the yellow metal rose by 82.22% for the same period on YoY basis. Imports of petroleum, crude and related products rose by approx 80.4%. The trade deficit widened to a four-month high at US$13.87 billion compared to US$22.7 billion for the same period, last year. 

According to The Hindu, exporters have sought relaxations on freight rates and container shortages to take adavantage of the steady recovery in the global trade. “The government needs to provide freight support to all exports till March 31, 2022, as freight rates have skyrocketed,"  A. Sakthivel, president of the Federation of Indian Exporters’ Organisations told the newspaper. 

Recurrent policy intervention and careful reading of data

While the recovery does offer optimism on multiple fronts but a steady recovery would require continued caution on spiking demand as well as manufacturing. It becomes imperative to exercise caution while comparing trends on a YoY basis. The economic growth had contracted in Q1 last year against a YoY comparision which points to a 20.1% growth. 

The economy is at the centre of an uncertainity triggered by the COVID-19 pandemic. It is ever-changing and any recovery requires a sustainable surety. Therefore, constant manouvery and policy intervention by the Central Government would hold key to a sustained recovery.

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