External Trade - trade deficit continues to shrink:; Edelweiss

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n  Trade deficit shrinks for third consecutive month

In December, India’s trade deficit shrank substaintially to USD 2.6 bn compared to USD 8.9 bn in October and USD 11.8 bn in same month last year. This is the lowest deficit in almost five years. Average monthly trade deficit so far in the current fiscal stands at ~USD 9.5 bn. Once again, improvement in exports and dip in oil imports compared to previous month led to the decline. Meanwhile, non-oil trade balance moved into surplus zone for the first time since March 2009.

n  Exports continue to post strong momentum

Exports continued on the recovery track 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 ~7.4% (average) in the past three months. On Y-o-Y 3MMA basis as well, they seem to have rebounded from a low of ~19% in September 2010 to ~28%. Going ahead, recovering global economy and depreciating INR will be supportive of India’s exports.

n  Imports decline for first time in 15 months

Imports, which in value terms have been stable in the past three months in the USD 27-28 bn range, declined to ~ USD 25 bn in December. They declined for the first time in 15 months, dipping 11% for December. The Y-o-Y 3MMA trend has also softened considerably, with growth dropping to just 2.3% in December compared to 14.7% in November. Sequentially too, imports continued to decline steadily with the M-o-M SA trend declining 3.8% in December. Surprisingly, oil imports declined to ~USD 6.9 bn in December compared to USD 7.7 bn in November, although crude oil prices increased from USD 84/barrel to USD 90/barrel over the same period. Going ahead, crude prices will be crucial in shaping the trend in imports and trade deficit.

n  Headwinds and tailwinds from global economy

Recovery in global growth in general and US growth in particular will continue to be supportive of India’s exports growth. However, rising crude oil and other commodity prices on the back of excess global liquidity could put upward pressure on imports. On balance, we believe that current level of trade deficit of USD 2.6 billion is one-off and it can widen again in coming months.