External Trade - trade deficit widens in October: Edelweiss

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n  Trade deficit widens on sequential basis

In October, India’s trade deficit stood at USD 9.7 bn, higher than ~USD 9.1 bn in September, but significantly lower than double-digit deficit numbers clocked in July and August 2010. Non-oil trade deficit shrank for the thrid straight month, touching USD 1.3 bn compared to an average of more than USD 2 bn over the past 12 months. However, cumulative trade deficit in April-October FY11 was ~25% higher than same period last year.

n  Exports growth consolidating after a sharp rebound

Exports in October came in at ~USD 18 bn, largely unchanged from previous month. Y-o-Y, exports grew 21.3%, a tad slower than previous month, but much higher than ~4% growth in same month last year. In CY10 so far, exports growth has eased from an average ~35% Y-o-Y in the first six months to ~21% in the last four months, partly reflecting the high base effect. This suggests that sharp exports growth is consolidating after a sharp cyclical upswing. Going ahead, uncertain external environment and real appreciation in INR (INR has appreciated ~8% since Jan 2010) could impact export momentum.

n  Imports growth slows down

Imports growth dipped to ~6.8% Y-o-Y in October compared to ~26% in September. This is the the slowest growth rate in the past 11 months, partly driven by high base effect. On 3MMA basis, imports have now slipped to ~25% compared to a peak of ~55% in April-May 2010. Oil imports during October stood at USD 8.4 bn, highest in the past five months, while non-oil imports were a tad softer compared to previous months. Oil imports constituted 30.4% of total imports during the month, much higher than 27.6% in the previous month. Going ahead, crude oil prices will be crucial in shaping India’s trade deficit.

n  External environment remains uncertain

US economic data has improved lately, particularly with regards to industry, but housing and labour markets continue to remain weak. Europe is witnessing resurgence of sovereign risk while Chinese authorities are trying to curb excessive lending and inflation in the economy. In EMs, PMI indices in South Korea, Taiwan and Brazil have softened to around 50-51, but remain strong for India and China. In the wake of uneven recovery in western economies and lingering risks in the global financial system, global trade flows could be impacted.