India’s balance of payments position on a razor’s edge, says Nomura  

August 16, 2012

The sharp drop in exports and higher oil prices in India are offsetting the improvement in the country’s trade deficit, says Nomura Economic Research

 
Moneylife Digital Team

Nomura Economic Research believes that India's balance of payments position is on a razor's edge. This is predominantly due to the fact that oil prices are already above $110/bbl, and that there have been large external commercial borrowing redemptions and rising FDI repatriation. 

According to initial estimates by the ministry of commerce, India’s trade deficit widened to $15.5 billion in July 2012 from $10.3 billion in June 2012. Exports contracted for the third straight month, by 14.8% y-o-y (year-on-year) last month, following a 5.5% contraction in June 2012. There has been weaker demand from the US and Europe and a strong negative base effect, which has more than offset the positive impact of rupee depreciation. 

Likewise, imports contracted 7.6% y-o-y in July 2012 after a 13.5% decline in the same month last year, reflecting weak domestic demand and negative base effects.

Nomura believes that the bounce back in oil prices has increased the oil import bill over June 2012. 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 country’s trade deficit. 

The global financial agency expects 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.