External Trade - trade deficit narrows to single digit :Edelweiss

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n  Trade deficit narrows to ~USD 9 bn

In September, India’s trade deficit narrowed to USD 9.1 bn, significantly lower than ~USD 13.0 bn in August, but higher than ~USD 6.9 bn in September 2009. At this level, deficit is the lowest in the past nine months. This narrowing was driven largely by a revival in exports, which surged to the highest level in the past six months. Non-oil trade deficit narrowed signifcantly to ~USD 1.6 bn from ~USD 5.2 bn in August. However, cumulative trade deficit in April-September FY11 was higher than same period last year.

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n  Exports rebound

September exports, at ~USD 18.0 bn, rose to the highest level in the past six months. Y-o-Y, exports grew 23.2%, faster than ~22.5% in August, reflecting some favourable base effect and rising prices. The current level of exports is slightly below the pre-crisis level of mid-2008 (~18.5-19.0 bn USD). In the first six months of FY11, exports expanded ~28% over the same period previous fiscal. However, headwinds like weak external demand and strong INR appreciation remain.

n  Non-oil imports fall marginally

Imports, which have been on an uptick in recent months, moderated to ~USD 27.1 bn. Y-o-Y, imports expanded ~26%, lower than ~32% in August. What contributed to the moderation was a decline in non-oil imports (from USD 21.9 bn in August to USD 19.7 bn in September).

Although the trade deficit has narrowed for September, there could be headwinds going ahead. Weak external demand and an appreciating rupee will keep export growth under pressure while strong domestic demand and rising commodity prices on the back of expectations around QE-2 will keep imports elevated.

n  Globally, race for weaker currency gathering pace

The Fed is facing prospects of renewed weakness in the US economy, with core inflation hovering around multi-decade low. Accordingly, it is looking to introduce a fresh round of QE to boost the economic activity by lowering interest rates. However, expectations of another round of QE and associated surge in capital inflows to EMs are presenting fresh challenges to EM central banks, including RBI.