External Trade - Trade deficit stabilises - Edelweiss

Trade deficit in August at ~USD15.7bn was broadly same as ~USD15.5bn in July, as both imports and exports remained unchanged. However, looking at the longer range, for April-August, trade deficit narrowed to ~USD71bn compared to USD76bn in the same period last year. The decline in trade deficit despite sharp exports slowdown was primarily on account of fall in non-oil imports, particularly gold. In the coming quarter, the challenging external and domestic environment indicate that the current trend is likely to continue; ergo, trade deficit will also remain close to the current range.

Importantly, the current deficit range is not far from our FY13 expectation, in which we expect trade deficit and current account deficit to be ~USD185bn and ~USD65bn, respectively (~3.3% of GDP).

Weakness in exports continues

Exports in August came at ~USD22bn (second month in a row), much below the ~USD25bn in recent months. On trend basis (after seasonal adjustments), exports growth has declined sharply during the past few months. This is not a surprise given the frail external environment and softening global commodity prices. Over the coming quarters in FY13, external demand scenario is likely to be weak; ergo, exports growth is unlikely to see any sharp turnaround. Although a sharp depreciation in INR, both on nominal and REER basis (from August 2011), is likely to lend some support to export growth. September HSBC manufacturing PMI posted some improvement in new export orders growth.

Imports showing signs of slowdown

Imports in August came in at ~USD38bn, not far from the past few months' average of ~USD40bn. Importantly, on trend basis, imports seem to be slowing at a pace similar to exports (both contracted ~6% YoY for April-August). Within imports, weakness seems to be concentrated in non-oil items. Frail growth in non-oil imports in a weakening economy is a normal phenomenon, and accordingly, this weakness is expected to continue till the economy recovers. Decline in gold imports is further aiding reduction in non-oil imports.

Notably in August again, gold imports were at ~USD2.6bn compared to ~USD5.0bn average monthly gold imports in FY12. But oil imports continue to remain elevated at ~USD13bn as oil prices have not declined materially. In sum, import slowdown is expected to continue in coming months on account of the decline in non-oil imports, particularly gold.

Trade deficit not far from average

In August, trade deficit came at ~USD15.7bn, not far from ~USD15.5bn in July. Importantly, trade deficit has not widened materially in recent months despite steep slowdown in export growth, as decline in imports compensated for it. Over the course of the year, we expect monthly trade deficit to remain around the current levels.

Source : Equity Bulls

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