According to initial estimates by the Ministry of Commerce, India’s trade deficit widened to US$15.5bn in July from US$10.3bn in June. Exports contracted for the third straight month, by 14.8% y-o-y in July, following a 5.5% contraction in June as weaker demand from the US and Europe and a strong negative base effect more than offset the positive impact of INR depreciation. Likewise, imports contracted 7.6% y-o-y in July after a 13.5% decline in June, reflecting weak domestic demand and negative base effects.
While details are not yet available, we believe that the bounce back in oil prices in July likely increased the oil import bill over June. Therefore, even as non-oil imports have started to fall, reflecting a slowing economy, the sharp drop in exports and higher oil prices are offsetting the improvement in the trade deficit. We expect the lagged effect of rupee depreciation and lower oil prices to narrow the current account deficit to around 3% of GDP in FY13 (year ending March 2013) from a record high of 4.2% in FY12. However, with oil prices already above USD110/bbl, large external commercial borrowing redemptions and rising FDI repatriation, we believe India's balance of payment remains on a razor's edge.