Still a deficit

That the improvement in trade deficit figures for February has been a function of falling imports is heartening.

The compression in imports will no doubt be temporary, while the stronger base effect of the last seven months during which exports saw a positive run, could have resulted in seasonally adjusted export decline of just 7 per cent during February compared to January. However, the year-on-year decline of 3.7 per cent still makes the fall substantial. Lower crude prices at nearly $109 a barrel helped whittle down export earnings, while continued weak domestic demand and restrictions on gold imports have compressed imports as well. This can be seen in the steep 24.5 per cent year-on-year fall in non-oil imports. Restrictions on gold imports also aided the process. The real positive is that oil imports have continued to fall, albeit slower than in January.

After the last few months of scrambling to sell off dollars to forestall further decline of the rupee, there is speculation that the apex bank will again start buying dollars to prevent the rupee from strengthening too rapidly. This is a possibility given the current buoyant mood of the market which has high hopes that a new government coming in after the elections will provide stability to policy moves. Buying dollars at this point will add to the foreign exchange buffer which will also safeguard exports against volatility of the yuan and other currencies. The RBI’s moves to strengthen the currency going ahead will help lower cost of overseas debt, and consequently, of imports.

The government’s pegging of GDP growth at well over 5 per cent for the next fiscal, will keep the markets at a temporary high along with the strengthening of the rupee if RBI follows through on the gains made so far. Petroleum exports have been muted since November, but as the export markets improve the government should also look at increasing its share of petroleum byproducts in the global market. Imports across the board saw double-digit contraction in February, but once inbound gold shipments soar on the back of lesser restrictions expected from the government any day, one can expect other exponents of the CAD to rise, along with imports of oil, consumption and investment goods. This could again bring the trade deficit to where it stood about a year ago.

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