India’s goods trade deficit narrowed to $26.9 billion in August, but strong imports and an elevated core deficit could keep pressure on the trade balance, Nuvama Research said.
India’s goods trade deficit could stabilise around its current levels in the near term, with oil prices emerging as a key factor for the country’s external trade balance, Nuvama Research said in a report.
India’s goods trade deficit narrowed by $5.1 billion month-on-month to $26.9 billion in August, driven by an improvement in the oil deficit and lower gold and precious metals imports.
“While the trade deficit has narrowed, it could stabilise around current levels with oil prices remaining the key monitorable,” Nuvama Research said.
The brokerage expects export and import momentum to remain firm in the near term, partly reflecting higher prices. It also noted that strong FCNR inflows could provide a cushion and limit near-term pressure on the Indian rupee.
The improvement in the headline trade deficit was led by a $1.5 billion narrowing in the oil deficit to $9.9 billion. The deficit in gold and precious metals also declined by $1.3 billion, as imports of both commodities fell.
However, the underlying trade picture remains mixed. The core trade deficit, excluding oil and gold, narrowed by $2.3 billion to $15 billion, but remained close to record levels, according to the report.
The improvement in the core trade balance was broad-based, with trade balances strengthening across chemicals, agriculture, electronics and engineering goods.
More from BusinessElectronics exports surge
India’s goods exports grew 26.1 per cent year-on-year in August, accelerating from 19.6 per cent growth in July.
On a trend basis, non-oil export growth increased to 17 per cent from 14 per cent, supported by a sharp rise in electronics exports. Electronics exports jumped 51 per cent, compared with 27 per cent previously.
Nuvama, however, cautioned that the surge in electronics exports appears to have been partly driven by prices, coinciding with higher global chip prices.
Excluding electronics, non-oil export growth remained broadly stable at around 12 per cent on a trend basis.
Imports remain strong
On the import side, goods import growth moderated to 14 per cent in August from 17.5 per cent in July.
However, core import growth on a trend basis accelerated to 24 per cent from 21 per cent, reflecting strong demand for electronics, engineering goods and ores.
Going ahead, Nuvama said the pace of import demand and the performance of non-oil exports will remain critical for India’s trade balance. The brokerage also flagged the elevated core trade deficit as an area that warrants close monitoring.
Oil prices will remain particularly important, as a sustained rise in crude prices could widen India’s import bill and put renewed pressure on the overall trade deficit.
