Sep trade deficit narrows - DBS Research Report

Sep merchandise trade deficit narrowed to USD 10.4bn from USD 12.4bn the month before, with both legs of trade continuing their weak run. Exports contracted by a sharp 24.3% YoY in Sep, taking the Apr-Sep cumulative growth down 17.6%. Imports tumbled 15% in Sep, dragged by a shrinking oil import bill (-54.5%) and lower non-oil purchases, primarily gold. Gold imports halved in nominal terms, slipping 45% YoY in Sep, though seasonal demand next month is likely to stoke a rebound in this component. Non-oil non-gold imports, routinely seen as a proxy for the underlying demand conditions, continued to flatline in nominal terms, slipping down a modest -1.1% in first half of fiscal year FY15/16 (Apr-Sep).

Notwithstanding a slightly narrower Sep trade deficit, while lower commodity prices have helped to depress imports, a concurrent weak run in exports has negated a potential boost to the trade balance. This dismal exports performance could be partly attributed to the strong appreciation in the US dollar understating the real growth in the sector (DBS; India: the lowdown in exports; 9Oct15). Equally responsible are sluggish external demand, a drop in commodity earnings and real rupee gains.

In particular, falling commodity prices have turned into a double-edged sword particularly on the trade front. Petroleum exports, accounting for about a fifth of the exports earnings, fell 59% YoY in Sep. Iron ore exports remained weak at -35% and rice fell by 6%, while cotton yarn nudged up a modest 5%. India's position on free trade agreements is also under scrutiny after the Trans-Pacific Partnership agreement (TPP). In this light, the government's target to raise India's exports from USD 310bn in FY14/15 to USD 900bn over the next five years is likely to be an uphill task. In addition, weak exports will also weigh on growth. Exports account for a quarter of the GDP, but with imports' weightage also equally strong, net exports have persistently been a drag on growth.

Overall, factoring in our estimates for weak goods exports, service trade earnings (-4% in Apr-Aug 15 vs last year) and steady transfer incomes, we estimate the current account deficit to widen modestly to -1.6% of GDP in FY15/16 from -1.4% in FY14/15. But this is unlikely to rock the boat, as at current levels the deficit is still below the pain threshold of -2.5% and funded by ample portfolio inflows and long-term foreign direct investments. A narrower current account deficit will also reduce external funding risks, especially ahead of the much-anticipated monetary tightening by the US Fed.

Source : Equity Bulls

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