India's Trade Gap Narrows on 77% Drop in Gold Imports

India's trade deficit narrowed in January, helped by higher exports and a huge drop in the import of gold and silver, improving the outlook for the country's frail current account balance.

India's trade ministry said it had recommended easing restrictions on gold imports, in the wake of the improving trade scenario.

The trade deficit in Asia's third-largest economy stood at $9.92bn (£6bn, €7.2bn) in January compared with $10.14bn in December 2013, a trade ministry official said on 11 February.

Merchandise exports rose 3.79% on an annual basis to $26.75bn, compared with a 3.5% annual growth in December.

Meanwhile, imports dropped 18.07% on an annual basis to $36.57bn led by a 77% drop in gold and silver imports on the year.

India expects to keep its current account deficit down under $50bn in the financial year to 31 March, 2014.

Barclays Capital said in a note to clients: "India's trade deficit was $9.9bn in January (Barclays: USD10.5bn), improving a bit from $10.1bn in December. Exports rose 3.8% in January after a 3.5% increase in December. Oil imports fell to $13.2bn from $13.9bn in December, and fell 18% y/y, driven by continuing disruptions in the petrochemical sector. The trade deficit continues to run well below the 12mma of nearly $13.0bn.

"Overall, we expect India's trade deficit to remain manageable in the coming months on decent momentum in exports and continued restrictions on gold imports. The YTD FY 13-14 (April-January 2013) trade deficit of ~$119.7bn is considerably lower than the ~$167bn recorded in the year-earlier period."

Capital Economics said in a note to clients: "The rupee has come through the recent EM turbulence largely unscathed. But the authorities have hinted at the possibility of easing the gold import curbs that have reduced the trade deficit and thereby supported the currency. We think policymakers will proceed cautiously, with rupee stability their main concern. On this basis, we expect the rupee to end 2014 close to its current level relative to the dollar. However, if the curbs are relaxed prematurely, a weaker outturn is more likely.

Gold Import Curbs

Three upward revisions to the import duties on gold in 2013, to a record 10%, and restrictions tying purchases to exports, resulted in an almost 90% drop in the imports of the yellow metal in the six months to November 2013.

India's official imports were 21 tonnes in November, markedly below the record of 162 tonnes struck in May and down from 2012's monthly average of 72 tonnes, according to Thomson Reuters GFMS.

The South Asian nation was the top gold consumer prior to the government diktat, aimed at discouraging gold imports in a bid to reign in a huge trade deficit.

India's trade shortfall struck a record $87.8bn in the previous fiscal year, triggering a record fall in the value of the rupee against the US dollar last summer.