Late last month, India surprised 51 out of 52 economists when the RBI cut rates by 50bps.
Although economists have a reputation for being terrible when it comes to making predictions (getting it wrong perpetually is almost a job requirement), it’s difficult to understand how 51 of them failed to see a cut of that magnitude in the cards.
After all, it was just a little over a month earlier when the Indian government’s chief economic advisor Arvind Subramanian told ET Now television that India may need to "respond" to China’s monetary policy stance. He also hinted at further export weakness to come.
Here’s what the REER picture and the export picture looked like going into the RBI meeting:
[8]
[9]
And here’s what Deutsche Bank had to say in August:
Currency competitiveness is an important factor in influencing exports performance, but global demand is even more important, in our view, to support exports momentum. Global demand remains soft at this stage which continues to be a key hurdle for exports momentum to gain traction.
Hence the outsized rate cut.
So that's what the picture looked like going into Thursday’s export data and unsurprisingly, the numbers definitively show that global trade is in freefall. Here’s Reuters [10]:
India's exports of goods shrank by nearly a quarter in September from a year ago, falling for a 10th straight month and threatening Prime Minister Narendra Modi's goal of boosting economic growth through manufacturing.
India's economy, Asia's third largest, is mostly driven by domestic demand, but the country has still felt the effects of China's slowdown. Exports have dropped and consumer and industrial demand for imports has weakened.
Imports fell 25.42 percent in September from a year earlier to $32.32 billion. Exports stood at $21.84 billion, according to data released by the Ministry of Commerce and Industry on Thursday.
"We see no signs of revival in exports in the near future," said Ajay Sahai, director general of the Federation of Indian Export Organisations. "We will be lucky if exports could even touch $265 billion to $270 billion for the whole year."
So yeah, both exports and imports fell by a quarter. That's right, by a quarter.
[11]
And so India finds itself in the same position as many other emerging economies in a world where trade is grinding to a halt: hoping that your own domestic demand for imported goods is even more abysmal than other countries' demand for the goods you export just so the current account doesn't collapse. Here's Reuters again:
Policy makers were nonetheless relieved, because the trade deficit narrowed to $10.48 billion last month from $12.5 billion in August as gold and oil imports declined. For April-September, the trade deficit shrank to $85.36 billion from 497.17 billion a year earlier, the data showed.
But as Goldman notes, even this dynamic may be set to disappoint because the expected benefit on the deficit from falling commodity prices is not as large as expected due to the fact that India... exports some commodities:
Given the sharp decline in exports, we think the benefits of the commodity price decline on India's trade balance may not be as large as widely perceived due to the significant commodity content within its exports.
The takeaway is this: if you needed further evidence that global trade is in the doldrums and seemingly getting worse by the month, simply see the above. Of course the hope will be that the RBI's easing will boost exports and further narrow the deficit, but again, this is just a race to the bottom with the entire world attempting to out-ease one another in a desperate attempt to stay ahead of the pace at which global demand is contracting.
There's nothing positive (let alone sustainable) about that.
