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External Trade - trade deficit shrinks in November
n Trade deficit shrinks for second month
In November, India’s trade deficit shrank to USD 8.9 bn compared to USD 9.7 bn in October and USD 10.1 bn in same month last year. Average monthly trade deficit so far in the current fiscal stands at ~USD 10 bn. Improvement in exports and decline in oil imports compared to previous month led to the decline. Non-oil trade deficit shrank for the fourth straight month to USD 1.2 bn compared to an average of more than USD 2 bn over the past 12 months.
n Exports post strong sequential momentum
Exports, which were weak during Q2FY11, seem to be recovering in Q3FY11 as reflected in the sequential seasonally adjusted data. After growing at an average 0.5% M-o-M SA (3MMA) basis in Q2FY11, exports picked up pace, growing at ~7% (average) in the past two months. On Y-o-Y 3MMA basis as well, exports seem to have rebounded from a low of ~19% in September 2010. This trend seems to be in line with industrial activity, which rebounded strongly in October after a period of weakenss in August and September 2010. Going ahead, recovering global economy will be supportive of India’s exports, although INR movement will also be crucial.
n Imports growth slows down
Imports in value terms have been stable in the past three months in the USD 27-28 bn range, with Y-o-Y 3MMA trend somewhat softening in the past two months. The sequential M-o-M SA 3MMA trend also reflects some weakness in recent months. In the latest month, while non-oil imports have increased compared to the previous month, oil imports have declined such that the latter as percaentage of total imports declined during the month, at ~28% compared to over 30% in the previous month. Going ahead, crude oil prices will be crucial in shaping the trend in imports and trade deficit. International crude oil prices have increased from an average USD 81/ barrel in Oct to USD 84/barrel in November and USD 89/barrel in December.
n Headwinds and tailwinds from global economy
US growth prospects have improved meaningfully after the extension of tax benefits by US Congress and this augurs well for EM growth and global trade. This should be supportive of India’s exports growth. However, rising crude oil and other commodity prices on the back of excess global liquidity and improving US growth prospects means that imports may rise in the coming months. Accordingly, we expect India’s trade balance to hover around current levels with a widening bias in the coming months.
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