India's February merchandise trade deficit balloons to US$14.9b

Indian economy heaved a sigh of relief.

According to DBS, the narrower February merchandise trade deficit at USD 14.9bn from USD 17.1bn average in the prior ten months is a welcome relief for concerns over the deteriorating current account position. 

This improvement came on the back of 4.2% (YoY) rise in export growth, while imports trailed at 2.6%. While the headline suggests that the rebound in export receipts led to the narrower trade gap, the seasonally adjusted series shows that slowdown in imports was the bigger driver for the improved trade balance.

Here's more from DBS:

Much of the latter appears to have stemmed from lower non-oil imports, especially pullback in gold/silver purchases.

While this is what the authorities had hoped for after the import duty on gold was raised in January by 2% to 6%, the troubles are far from over.

Firstly, the imports of these precious metals were frontloaded after the import duty was first flagged late last year (Jan purchases jumped 23% YoY on volume basis).

Secondly, a meaningful moderation in the import bill will require the oil imports – which makes up for 34% of the total bill - to be curtailed, something that is yet to materialise.

The government’s recent decision to partially deregulate diesel pricing is expected to rationalise demand for the state-administered fuel products going forward, though no near-term relief is on hand. Prevailing Brent prices are also close to 13% higher that mid-2012 levels, putting a further strain on the government coffers and leading to increase in under-recoveries for the domestic oil companies.

On the current account troubles, thereby, a sharp negative in 3Q (Oct-Dec) could be followed by partial relief in 4Q. Nonetheless for FY12/13, the current account deficit should stand closer to our estimate of 5.0% of GDP worse than 11/12’s 4.2%.