The merchandise trade balance narrowed sharply in December. At $9.34 billion the unadjusted shortfall was down fully 44 percent versus its October outturn and also more than 7 percent short of its print a year ago.
However, despite the year-end improvement, both sides of the balance sheet contracted. Hence, exports followed their 7.3 percent rise in mid-quarter with a 3.8 percent annual decline and imports were off 4.8 percent after a near-27 percent surge last time. Tumbling oil prices and a reduced demand for gold (down 76 percent on the month) were largely responsible for the sharp reversal in the latter.
If sustained, weaker fuel costs will have a significant positive impact on India's current account deficit which, in turn, should provide a handy boost to investor confidence and, hence, the rupee.
The foreign trade data relate to total sea, air and land trade and on private and government accounts. Exports are on f.o.b. basis and imports are on c.i.f. basis. Exports include re-exports of foreign merchandise previously imported to India and imports relate to foreign merchandise whether intended for home consumption, bonding or re-exportation. Direct transit trade, transshipment trade, passengers baggage, ship's stores, defense goods and transactions in treasure i.e. gold and current coins and notes, diplomatic goods and "proscribed substances" under Atomic Energy Act, 1962, are excluded from the trade data, while indirect transit trade, transactions in silver (other than current coins) and in notes and coins not yet in circulation or withdrawn from circulation are included.
Changes in the level of imports and exports, along with the difference between the two (the trade balance) are a valuable gauge of economic trends here and abroad. While these trade figures can directly impact all financial markets, they primarily affect currency values in foreign exchange markets.
Imports indicate demand for foreign goods and services in India. Exports show the demand for Indian goods in countries overseas. The rupee can be particularly sensitive to changes in the trade deficit run by India, since the trade imbalance creates greater demand for foreign currencies. The bond market is also sensitive to the risk of importing inflation. Data are reported in US dollars and Indian rupees.
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