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Lower CAD: BofA-ML's three reasons why exports will pick up

(Bank of America Merrill…)

NEW DELHI: Stating that a long-term stability in rupee can be driven only be a lower Current Account Deficit ( CAD), Bank of America Merrill Lynch (BofA-ML) in its latest report has said that it sees a likely up tick in India's exports.

"We visited some garment and textile exporters and have come away with a sense that exports will see a pick-up over the next few months," the bank said. Textile (including garment) exports, at $27 billiom, are India's third-largest export item and account for 9% of the country's total exports.

In the bank's report Jyotivardhan Jaipuria, Research Analyst, DSP Merrill Lynch (India) has cited three reasons; revival of US demand, rupee depreciation helps competitiveness and accidents and more stringent safety measures in Bangladesh - as the key factors that will drive exports up.

Revival of US demand: "There is a definite pick up in demand from the US, following improved economic activity there," the bank said. The US is the largest export destination for Indian textile and garment exports, accounting for around 18% of total exports. "While EU demand is still sluggish, it is no longer deteriorating," the bank added.

Rupee depreciation has helped competitiveness: According to BofA-ML, margins have picked up for exporters with the sharp rupee depreciation. "The exporters believe that they will gradually see margins back to normal levels, but also should see some volume growth, as they have become more competitive compared to countries like China and Bangladesh that are big players in the trade," the bank said.

Accidents and more stringent safety measures in Bangladesh: Bangladesh had a fire in a garment factory last year, followed by the collapse of a building this year. "This could lead to greater safety standards and increase their cost of production. While this is a small point, it is helping on the margin," the bank opined.

Export growth in India has fallen sharply from over 20% in 2011 to negative or low single digits in the past year. The bank feels that a revival in exports accompanied by a compression in imports (especially in gold) could help the trade deficit reduce to the $10-12 billion per month level over the next few months.

"This is essential for the stabilization of the rupee, since the capital flow environment will get tougher as US interest rates rise and the Fed tapering reduces risk appetite," the bank concluded.