J.P. Morgan - What's not to like about India's May trade deficit?

What’s not to like about India’s May trade deficit?

India’s May trade deficit represented the best of all worlds. First, exports rose solidly for second successive month, allaying fears that the export slowdown in 1Q14 was going to sustain. Simultaneously, non-oil, non-gold imports continue to recover, suggesting that domestic demand may is healing (though some of this could also potentially be attributed to the nominal and real appreciation of the Rupee in recent months). Both are good omens for growth. And the fact that the impulses offset each other in May, meant that the trade deficit remained well under control. After the disappointment of the first quarter, wherein exports contracted sequentially for two of the three months, they have bounced back sharply in 2Q. April saw sharp payback with a 6% sequential increase (m/m, sa). And May built on those gains, with exports growing another 4% sequentially (m/m, sa). Consequently, year-on-year growth surged to 12.4% oya in May, the highest in 7 months. On a 3m/3m, saar basis, exports are finally in positive territory for the first time since November 2013. The only caveat to all this is that new export orders have softened the last two months – compared to 1Q14 – and so its unlikely export momentum will sustain at this pace. There was some good news on the import front too. We have long argued that the CAD has narrowed, in part, because non-oil, non-gold imports have softened considerably, reflecting weak growth impulses at home. Over the last few months, however, non-oil, non-gold imports have begun to firm. While they were flat on a seasonally-adjusted basis in May, the 3m/3m, saar momentum has picked up significant steam in recent months. Finally, official gold imports inched up ($2.2 bn in May from $1.8 bn in April) but remain contained. However, they are expected to firm in the coming months in response to some liberalization of gold norms in May. Finally, as alluded to above, the rise in non-oil, non-gold imports in recent months is likely both on account of firming domestic demand as well as the nominal and real appreciation of the Rupee. The currency appreciation may also have a role to play in the fact that new exports orders (in the manufacturing PMI) have faded over the last two months – against a backdrop of firming global growth. That said, it’s too early to say these dynamics are on account of the Rupee appreciation. And, even if they were, it’s too early to raise any alarm bells. A trade deficit of $11 bn a month is tantamount to the CAD tracking less than 1% of GDP. And while we expect it to widen from these levels – as growth accelerates, gold norms are liberalized, and as an upshot of the FX appreciation – external imbalances are expected to remain well under control for the time being.

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