India’s latest export figures will please trend watchers. Outward shipments in May were up 15.5% from last year’s figure. Although a less exciting growth than April’s growth of over 30%, cumulatively for the first two months of 2022-23, exports accounted for over 22%. At this upbeat pace, we may see another year of strong exports breaking the record $418 billion in 2021-22, a jump from the previous peak in 2018-19. The impacts of COVID have been made in the past and India’s efforts to attract global supply chains may help sustain the trend. But we also have higher oil prices to thank for this year’s figures, at least in part because petroleum products made up a large portion of our overseas sales. They were up over 52% in May, making them our second largest export category. But there is a hassle in this. While the rise in oil brought profit, the costlier oil pushed up the sector’s import bill by 91 per cent. Overall, our trade deficit – or more than what we paid for imports over export earnings – widened to its widest margin of $23.3 billion. The pressure on this front is unlikely to ease soon.
Oil dependence has always had our external imbalances in its thrall, but the current blow is particularly bad. Global price levels are up about 55% this year. With the Russo-Ukraine war now in sight of no end in the last 100 days and Europe set to shut down most of its Russian intake, we cannot count on a cool-off in the near term. Oil cheaper than Russia, meanwhile, faces logistics and insurance burdens that negate some of its savings. Throw in the impact of climate action, which could result in a tightening of OPEC’s grip as non-OPEC production slows, and the scenario paints swell bills for months to come. Overall energy costs are rising globally. Coal imports up 167% in May to meet power shortage; The domestic supply of black goods is poor and our appetite for it is increasing. Thus we can expect India’s trade gap to widen and rupee to weaken as demand for the dollar improves. The capital market has already seen selloff by foreign investors, whose exit through conversion of the rupee into the greenback has led to a fall in its value. The rise in US interest rates and the depreciation of the rupee due to local inflation could lead to more money being withdrawn from India. In a war-torn world, ‘safe haven’ properties are luring investors.
Should the Reserve Bank of India (RBI) respond? And, if so, how? Its common practice is to buy and sell dollars to control volatility, but otherwise let the exchange rate float. Its reserves of reserves, which have recently fluctuated by about $600 billion, are enough to keep the external crisis at bay. However, the priority of RBI at this point of time is inflation control. If it lengthens its horizon for external stability and chooses to consider the current oil spike as momentary, it may choose to strategically push the rupee further with the aid of internal price stability. Selling dollars will reduce domestic liquidity and also reduce oil bills. Given the tight position we are in and changing views on currency volatility, a brief period of special support is unlikely to attract US condemnation. It can only serve as a calculated bet on a major export boom at the other end of this ‘bridge’. And we can count on such a boost only if the Center is confident that the use of public funds for manufacturing incentives will soon turn back into foreign income as we join the global supply chain. As world trade is expected to slow down this year, we will need to expedite deals and grab every opportunity. Keep the option of one rupee bridge open.