India: Trade deficit narrows at unsustainable pace - Standard Chartered

"India’s September trade deficit, at USD 13.9bn, was a positive surprise; it was the narrowest in six months and was much better than our (and consensus) expectations of USD 17.2bn," note Standard Chartered analysts.

Key quotes

"The narrowing was broad based as oil, gold (including jewellery/ precious stones) and the non-oil non-gold trade balance improved."

"A simple extrapolation of the September trade data for rest of the year poses downside risks to our FY19 (year ending March 2019) C/A deficit forecast of 3% of GDP. However, we leave our forecasts unchanged as we need to monitor the sustainability of the latest data. We also believe that inferring that a weaker Indian rupee (INR) and higher oil prices have had a mitigating impact on the widening trade deficit is premature based on one month’s data. We expect the trade deficit to widen from next month onwards, though a sharp widening towards the USD 17.5bn recorded during June-August 2018 is unlikely to become the norm. Oil prices, however, remain the wild card."

"Narrowing of the trade deficit to USD 13.9bn looks unsustainable. We believe that like July’s USD 17.8bn trade deficit, September’s USD 13.9bn reading is unlikely to be sustained. We expect an average monthly trade deficit of USD 16bn for remainder of the fiscal year for two reasons. First, relative to FY18, the price of India’s crude oil basket has increased by USD 18/bbl to USD 74/bbl (FYTD19). We estimate that every USD 1/bbl rise in oil prices widens the trade deficit by USD 1.4/bbl, ceteris paribus. Therefore, the oil trade deficit is likely to widen from levels indicated in the September data."