What you need to know about India's 8-month low trade deficit

Too early to call this the start of a trend, says analyst.

According to Nomura, India's trade deficit narrowed sharply to USD14.9bn in February from USD20bn in January (Nomura: USD17.4bn), much lower-than-expected.

Nomura adds, it is too early to call this the start of a trend. Nomura expects the trade deficit to widen again in March and the current account deficit to rise to 5.1% of GDP in FY13 (year ending March 2013) from 4.2% in FY12.

Here's more:

Surprising the markets positively, India‟s trade deficit narrowed to an eight-month low of USD14.9bn in February from USD20bn in January (Nomura: USD17.4bn). We see five reasons for this improvement.

1) Q1 tends to be seasonally favorable for the trade balance. We estimate that the seasonally adjusted trade deficit narrowed to USD18.0bn in February from USD20.9 in January, suggesting that of the USD5.1bn improvement in trade balance around USD 2.2bn is due to seasonal factors. 

2) Export growth momentum improved to 4.2% y-o-y in February from 0.8% in January, while import growth fell to 2.6% from 6.1% in January. On a three-month seasonally adjusted annualized rate basis, we estimate that exports rose 44% in February from 25% in January, while imports eased to 44% from 68%. 

3) Gold imports were frontloaded in January ahead of the expectations of the hike in custom duty on gold imports on 21 January leading to some payback in February. 

4) Oil imports moderated by USD751mn to USD15.1bn in February. With oil prices higher this month, this likely reflects lower volume growth following the government‟s decision to allow oil-marketing companies to sell diesel to bulk users at market-determined (non-subsidized) prices. 

5) Additionally, non-oil/non-gold imports also moderated, though the details are not yet known.

In our view, it is too early to call this the start of a trend as imports remain commodity-intensive while manufacturing imports are partly substituting for domestic production due to supply-side constraints.

We expect the trade deficit to widen marginally in March from February‟s level, though it should remain much smaller than the Q4 average of USD19.8bn.

Notwithstanding the monthly fluctuations in the trade deficit, we expect the current account deficit to rise to 5.1% of GDP in FY13 from 4.2% in FY12 because of a lower invisibles balance, our view of weak global growth in 2013 and persistent domestic demand-supply imbalances.

We expect the current account deficit to remain high at 5.0% of GDP in FY14 as well.