External Trade - export momentum keeps trade deficit contained :Edelweiss,

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n  Trade deficit stable

In Feburary, India’s trade deficit was stable at ~USD 8 bn, same as last month. Total deficit in the current fiscal (April-February) stands at USD ~97 bn against USD 100 bn for the same period in the previous fiscal. Meanwhile, owing to strong momentum in exports in recent months, non-oil trade balance posted a surplus ~USD 0.1 bn against average monthly deficit of ~USD 2.6 bn in H1FY11.

n  Exports momentum very strong

Exports continued to post strong growth, ~50% against ~32% last month, Y-o-Y. On seasonally adjusted (SA) sequential basis too, exports have grown strongly since late last year. After growing at an average 0.5% M-o-M SA (3MMA) basis in H1FY11, exports picked up pace, growing at ~7% (average) in the past six months. On Y-o-Y 3MMA basis as well, they have rebounded from a low of ~19% in September to ~40%. Going ahead, we expect export growth to moderate from the current high levels, given the slowing Chinese and other Asian economies due to monetary policy tightening.

n  Non-oil imports growth robust

Imports, grew strongly, ~21% Y-o-Y in Feburary from ~13% Y-o-Y in January, mainly on account of pick-up in non-oil imports (up ~33% against ~24% last month. The Y-o-Y 3MMA trend improved substantially, increasing to 8.2% in Feburary against 4.5% in January. Q-o-Q too, imports registered an uptick, soaring to 10.5% (SA, 3MMA) from 6.0% (SA, 3MMA) last month. Surprisingly, oil imports grew only marginally, to ~USD 8.2 bn in January from USD 7.9 bn in the previous month, despite uptrend in crude oil prices.

n  Crude prices may catch up with trade balance

The current growth momentum in exports (~50%) is much above the trend and is unlikely to sustain. The EM Asia, India’s major export destination, may see some moderation in economic activity, given aggressive monetary tightening and moderation in China. At the same time, rising crude prices (on the back of political tensions in the Middle East) is a major headwind to the trade balance, as India is a large importer of oil (accounting for ~25% of the total import bill). Accordingly, if crude continues to remain elevated at ~100 USD/barrel, trade deficit is likely to witness widening pressure in the coming months.