JP Morgan: India: PMI inches up and trade deficit plunges

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

India: PMI inches up and trade deficit plunges

December trade deficit narrows sharply as exports continue to surge and non-oil imports continue to disappoint Sharp moderation of the trade deficit in recent months could result in FY11 trade deficit printing less than FY10 and, in turn, the current account deficit printing less than 3% of GDP, lower than the 3.5% forecast of the RBI January PMI inches up as output and new orders rise Trade deficit plunges as exports continue to surge December’s monthly trade deficit plunged to $ 2.6 billion from $9 billion the month before and the $11-13 billion monthly average witnessed earlier this year. The trade deficit has moderated sharply in recent months, as exports have surged and import growth has moderated, and December saw these dynamics being accentuated. Export growth surged 10.7 % m/m, sa (36.4 % oya), the fifth consecutive month that exports have shown robust growth on a sequential basis. We have been arguing for a while (see, “India: more open than you think,” October 14, 2010) that India’s exports are very sensitive to changes in global demand, and the behaviour of exports over the last few months has added credence to this view, as exports have responded sharply to a pick-up in growth in key developed markets. With global growth set to accelerate in 1Q2011 the recent buoyancy can be expected to continue, despite the surprising fall in today’s PMI new export orders (see below) In contrast, imports continued their volatile behavior over the last few months by declining 3.1 % m/m, sa (- 11.1 % oya). The decline was led by a sharp-drop in oil imports (- 5.6 % m/m, sa) as oil volumes ostensibly contracted sharply in response to a surge in crude pieces in December. Non-oil imports also declined on a sequential basis (-2 % m/m, sa), the third sequential decline in the last four months, another reminder that there has been no significant up tick in the non-infrastructure investment cycle. FY11 CAD likely to print below 3% of GDP The combination of buoyant exports and a delay in the capex cycle has meant the merchandise trade deficit has moderated much more sharply than was expected. The cumulative trade deficit for the 9 months of this fiscal year is about $82 billion and with only three months of data left for this fiscal, it is expected that the trade deficit for FY11 will print less, even in absolute terms, than the $109 billion trade deficit witnessed in FY10. This is a dramatic turn around from a few months ago when heightened global uncertainty threatened to curb export growth and strained domestic capacities seemed to suggest that a sharp pick-up in the domestic capex cycle was imminent. These changed dynamics over the last three months are expected to ensure that the current account deficit. for this fiscal will print lower than 3 % of GDP, significantly lower than the 3.5 % of GDP estimate that is being embraced by the RBI and others in the market. INR weakness driven more by inflation sentiment than CAD fundamentals The current weakness of the rupee is being driven more by perceptions of the RBI being behind the curve on monetary policy than it is on the worsening of current account fundamentals. As pointed out above, current account fundamentals have actually improved in recent months. However, the weakness and volatility of the rupee could persist if the current negative sentiment on inflation and perceptions of an inadequate policy response were to continue. January PMI inches up Meanwhile, bucking regional trends of a slight moderation, India’s January manufacturing PMI inched up to 56.8 from 56.7 the previous month. The slight up tick was driven by a moderate increase in both output (+ 1.2 pts) as well as new orders (+ 1.4 pts). In contrast, new export orders fell sharply (-2.5 pts), the second successive decline. This is surprising given the accelerating of activity in key export markets, and therefore most likely reflects a payback of the surge in new export orders two months ago. Output prices begin to respond to increasing input prices; not good for inflation outlook A key empirical regularity in the manufacturing PMI over the last few months has been the sharp upward march in input prices. January was no exception with input prices rising again. For the first time in seven months, however, the output price index rose (+ 2.0) more than the input price index (+ 1.3 pts). This is not surprising as margins have consistently been under pressure and it was a matter of time before output prices responded. This does not bode well for inflation, however, and underscores our view that inflationary pressures in the system remain firm and inflation is likely to be sticky for much of 2011.