3 reasons behind India's widening trade deficit

A deficit of over 2% og GDP is highly expected.

According to DBS, trade and inflation numbers will be out today and they will be critical towards assessing the sustainability of the current economic growth pace. Robust domestic demand growth, coupled with weak exports, has widened the trade deficit which reached USD 1.3bn in June.

Here's more from DBS:

For the full year, a deficit of over 2% of GDP is very likely. Three factors bear watching.

Firstly, the pace of domestic demand growth has resulted in the surge in imports over the last few quarters. The central bank is starting to recognize this and selective monetary tightening, such as the increase in the FASBI deposit rate, has already taken place. Further steps in this direction are likely to be taken, but a meaningful slowdown in import growth is likely to be some time away due to the lagged impact of monetary policy.

Secondly, the weakness in external demand is likely to persist amid concerns of a further slowdown in China and this will continue to have a dampening impact on commodity prices (especially coal prices). This should show up as continued weakness on the export front.

Thirdly, Brent crude prices have crept up above USD 110/bbl since hitting close to USD 90/bbl in June. This implies continued pressure on the overall trade balance as Indonesia is a net oil importer. In the immediate term, the trade deficit is likely to remain relatively wide as all three factors are not favorable. For July, we expect exports to contract by 10.9% YoY. Meanwhile, import growth should drop to 4% YoY after more than two years of double-digit expansion.

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