March is seasonally a positive month for the trade balance and hence, the latest data show a significant deterioration in India’s trade deficit

India’s trade deficit widened to a larger-than-expected $10.5 billion in March from $8.1 billion in February, on weak exports and a sharp rebound bunched-up payments in oil and gold imports due to easing of restrictions. Imports, excluding oil and gold, remained weak, indicating sluggish domestic demand.
 
March is seasonally a positive month for the trade balance and hence, the latest data show a significant deterioration, said Nomura in a research note.

It said, "The first quarter of 2014 current account is tracking -0.5% of GDP versus a mild surplus last month, but better than -0.8% in Q4 2013. We expect the current account deficit to widen to 2.3% of GDP in FY15 versus 1.8% in FY14 as a result of the easing of gold import restrictions and better domestic demand. That said, we expect net capital inflows to easily finance this deficit".

During March, India’s export growth continued to contract at -3.2% from 3.7% in February, while import growth rebounded sharply to -2.1% from 7.1%.


A sharper-than-expected jump in imports, mainly of oil and gold, was the main reason. Oil imports rose 17.7% from -3.1%, perhaps due to bunched up payments because of recent Indian rupee-US dollar appreciation. Gold imports rose to around $2.8billion from $1.4 billion in February, likely due to easing of some restrictions on gold imports. Excluding oil and gold, imports contracted by 11.0% following a 10.5% drop in January, suggesting that domestic demand remains very weak, Nomura said.

"As gold restrictions are relaxed further and growth starts to rise during the latter half of FY15 (year ending March 2015)," Nomura said, "we expect the current account deficit to widen to around 2.3% of GDP in FY15, larger than in FY14, but still within the sustainable range. With growth bottoming out and our expectations of a gradual improvement in the macro-economic environment after the elections, we expect net capital inflows to be more than sufficient to finance the current account deficit."

"We expect the Reserve Bank of India (RBI) to continue to proactively build its defence against any external shocks by accumulating FX reserves and discouraging short-term debt flows. In line with this view, our Asia FX strategists see scope for strong Indian rupee performance over the medium term, and forecast US dollar/Indian rupee at 59.5 by end-2014 and 57.5 by end-2015," the note added.