India's trade deficit narrowed to USD14.9bn in February

Thanks to the slowdown in imports.

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. 

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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.

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 wasraised in January by 2% to 6%, the troubles are far from over.

Firstly, the imports ofthese precious metals were frontloaded afterthe import duty wasfirstflagged late last year (Jan purchasesjumped 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 thatis yetto materialise.

The government’srecent decision to partially deregulate diesel pricing is expected to rationalise demand forthe state-administered fuel products going forward, though no near-term reliefis on hand.

Prevailing Brent prices are also close to 13% higherthat mid-2012 levels, putting a furtherstrain on the government coffers and leading to increase in under-recoveriesforthe domestic oil companies.

On the current accounttroubles, thereby, a sharp negative in 3Q (Oct-Dec) could be followed by partial relief in 4Q. Nonethelessfor FY12/13, the current account deficitshould stand closerto our estimate of 5.0% of GDPworse than 11/12’s 4.2%.