India’s trade deficit narrows in FY 2015-2016 on declining imports, exports unlikely to rebound quickly

India’s exports contracted 15.9% in FY 2015-16, mainly due to real rupee strength, declining commodity receipts and weak global demand. This partially offset the boost received from 15.3% drop in imports that narrowed the trade deficit from USD 138 billion in the previous year to USD 118.5 billion.

India’s exports are not expected to rebound quickly due to the nation’s close link with global imports, according to DBS Bank. Recently, the IMF and the World Bank lowered their outlook for global growth. Several important trading partners of India face slow domestic growth.

Meanwhile, India’s WPI inflation for March decelerated 0.85% y/y from -0.9% in January-February. However, the drop in the headline figure eclipsed the rise on sequential basis. But with the annual drop in March, WPI figures have been in negative for 17 consecutive months. Food inflation decelerated to 3.7% y/y from 5% in January-February. The index for minerals dropped 27%, while fuel declined 8.3%. Stripping commodities, WPI inflation accelerated 0.9% y/y in the first quarter of 2016 as compared with 0.6% in Q4 2015.

The decline in manufacturing segment slowed to -0.1% y/y from -0.9% in January-February; however, it has continued to remain in negative territory for 14 consecutive months. The segment rose 0.4% on monthly basis, the most rapid pace in almost two years. Core inflation also decelerated to 1.1% from 1.9%.

In the second half of this year, headline WPI is expected to accelerate due to fading base effects, but not to a higher degree due to weak domestic industrial activity and tradables, noted DBS Bank. For monetary policy, CPI inflation is a more vital measure. The recent deceleration in the headline inflation to 4.8% y/y has maintained the trend below central bank’s inflation chart. Possibility of another reduction of rate in H2 2016 has increased, added DBS Bank.