India Economy – Foreign Trade: Trade deficit narrows further - Anand Rathi

Strengthening of rupee since Sep'13 seems to have contributed to the contraction of exports in Feb'14, while decline in imports continued. Trade deficit narrowed to US$8bn in Feb'14. We expect trade deficit to start widening in 1QFY15. Increased trade (and thereby current account) deficit, coupled with likely fall in capital surplus (vs. 3QFY14), could weaken rupee during the quarter.

- Poor exports performance. India's exports contracted 3.7% yoy, to US$25.7, in Feb'14. This is a marked fall from 3.8% yoy growth in Jan'14. The cumulative value of exports in Apr-Feb'14 stands at US$281.9bn against US$270 in Apr-Feb'13.

- Imports continue to fall. Imports contracted 17.1% yoy, to US$33.8bn in Feb'14, following 18.1% fall in Jan'14. The cumulative value of imports in Apr-Feb'14 is at US$411.1bn against US$450bn in Apr-Feb'13.

- Non-oil imports move downhill. Non-oil imports contracted 24.5% to US$20.1bn in Feb'14, the ninth consecutive monthly fall. Ytd non-oil imports are at US$259.1bn vs US$299bn during the same time in FY13. Sharp decline in gold imports, coupled with weak domestic demand and deceleration in industrial activities, are keeping these imports low.

- Oil imports fall again. India's oil imports declined 3.1% in Feb'14 – the second consecutive fall this fiscal. Oil imports fell 10.1% in Jan'14. Ytd oil imports are at US$152bn vs US$151bn during the same time in FY13.

- Trade deficit narrows further. Owing to a greater softening of imports compared with exports, trade deficit narrowed to US$8.1bn in Feb'14 from US$9.9bn in Jan'14. This is the lowest deficit since Sep'13.

- Assessment and outlook. Sharp depreciation of rupee during May-Aug'13 played a key role in the acceleration of exports and contraction of imports. Rupee, however, has been one of the best performing currencies since then. The appreciation of rupee since Sep'13 seems to be decelerating India's export growth. After expanding in the past eight months, India's exports contracted in Feb'14. The general improvement in growth outlook of several major economies including Euro area, Japan and the US is likely to boost exports in the coming months. The downside risk, however, is the slowdown of the Chinese economy. With the continuation of gold import restrictions and lack of major impetus to domestic growth, especially in investment, we expect non-oil imports to remain subdued in 1HCY14. As the international crude oil prices are stable at ~110, we do not expect much change in oil imports. We expect export growth to remain subdued, while pace of contraction in imports may slowdown in 1HCY14. Consequently, the trade deficit may widen in 1QFY15. Larger current account deficit and deceleration in capital inflows are likely to lead to rupee depreciation in 1QFY15.

Source : Equity Bulls

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