Weak commodity prices narrow trade deficit, weigh on inflation in India

Oct exports slumped for the eleventh consecutive month, but the trade balance received a hand from the simultaneous collapse in commodity imports. Exports fell 17.5% YoY (vs 24.3% in Sep) outpaced by imports at -21% (vs Sep's -25%). Oil imports in particular declined 45% YoY, in red for more than a year. As a result, the trade deficit narrowed to USD 9.8bn recovering from average USD 11.3bn in the first half of FY16. 

Weak exports prices, lower agricultural/petroleum exports and a fall in engineering goods exports weighed on export receipts. Tumbling commodity prices have been a double-edged sword on the trade front, alongside sluggish global demand. While imports have benefited, export receipts (petroleum, farm and minerals e.t.c.) have taken a hit. The share of commodity exports has been rising in recent years, with a third of India's export earnings in a free-fall in the past year. In Oct, petroleum exports fell 57%, rice -41%, -85% in iron ore (other constraints have also crimped shipments). Global demand meanwhile remains weak as much of the Western economies, China and Asia face slowing demand at home. 

On the imports end, oil imports tumbled, with non-oil imports also down on the back of weaker price effects, subdued engineering goods imports and tumbling gold purchases. Gold imports slumped 60% despite low prices and the routine seasonal boost. The shift of key festivals to Nov might provide some support to volumes. Meanwhile, electronic imports have surpassed gold as the second highest import item so far this fiscal year. In Oct, electronic imports (integrated circuits, smartphone components) rose 13.6% steady from month before. This has led the nonoil trade deficit to widen anew in recent months. While this reinforces the need to step up electronics manufacturing under the Make in India aegis, industry estimates suggest that a step-up in domestic production will lag overall demand growth in this sector this year and the next. 

In sum, weak exports will weigh on growth. However, the near 10% narrowing in the Apr-Oct15 trade deficit vs the same period last year bodes well for the current account and other external imbalances. Out earlier in the day, Oct WPI bottomed-out with -3.8% YoY from -4.5% the month before, propped by base effects and jump in certain food categories. Food inflation ticked up to 2.4% from Sep's 0.7%, though its relatively smaller weightage (vs CPI food inflation), limited its net boost to the headline. A further pullback in global commodity prices saw the fuel (-16% YoY) and mineral (-31%) indices extend their double-digits decline. In addition, fading base effects saw the manufacturing product disinflation ease modestly, while core inflation continued to decline for the eighth successive month. In the coming months, easing base effects are expected to lift WPI headline readings into black in early-2016, but remain tepid. 

Implications for policy are dictated more by the CPI inflation movements than the wholesale counterpart. The spurt in Oct food inflation has stoked concerns over a rise in generalised price pressures and inflationary expectations. After the bunched-up 50bps cut in Sep and ahead of the widely-anticipated lift-off in the US rates by end-year, the Reserve Bank of India (RBI) is expected to pause in December.