India's trade deficit worsened sharply in May, after improving in March due to seasonality. This likely explains why the rupee has been weak despite large portfolio inflows, says Nomura
After a sharp improvement in March, India's trade deficit worsened in April and much more sharply in May. The seasonal worsening in May is as large as during the festive month of October and reflects a seasonal pick up in the imports of oil, fertilizer and chemicals. Gold imports also would have risen due to the bringing forward of demand in response to lower prices.
“One of the puzzling trends in recent weeks has been a stable-to-weak US dollar and Indian rupee, despite large foreign institutional investor (FII) fund inflows. In our view, the reason lies in the seasonal pattern in the trade balance. After the positive surprise in the March trade deficit, which improved to a two-year low of $10.3 billion, we expect the trade deficit to worsen again in April to $15.5 billion and much more in May," says Nomura in a research note.
According to CEIC and Nomura estimates a higher seasonal factor implies a higher trade deficit and vice-versa. Hence, March is the best month for the trade deficit while May and October are seasonally the worst months.
Portfolio inflows in India over the past fortnight have been robust with $5.6 billion invested in FII debt and equity together. Out of this $2.6 billion were invested in May alone.