IN: Merchandise Trade Balance

Mon Jun 15 19:00:00 CDT 2015

Actual Previous
Balance $-10.41B $-10.99B
Exports Y/Y -20.2% -13.96%
Imports Y/Y -16.5% -7.48%

The red ink on merchandise trade shrank from $10.99 billion in April to a 3-month low of $10.41 billion in May. The shortfall was also smaller than the $11.23 billion recorded in May 2014.

The headline reduction was due to sharply weaker imports which fell 16.5 percent on the year or more than twice the 7.5 percent rate of contraction posted at the start of the quarter. A drop in gold purchases, to $2.42 billion from $3.13 billion, was largely responsible. However, exports were disappointingly weak too and a 20.2 percent yearly fall here was much steeper than April's 7.5 percent decline and, indeed, the second worst performance since August 2009.

The trade balance is highly volatile on a monthly basis but the lack of any clear trend reduction in the deficit over the last year or so is a real worry given the relative weakness of the rupee. For now this may not be too much of an issue but with speculation about Fed tightening on the rise again, the sizeable external imbalance leaves the currency looking all the more vulnerable.

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transit trade, transactions in silver (other than current coins) and in notes and coins not yet in circulation or withdrawn from circulation are included.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.