India’s trade data for January supports our view that imports would decline more than exports in early 2009. We expect the trade balance to continue to improve in coming months, but the rupee is unlikely to benefit unless portfolio outflows decelerate (i.e., market sentiment improves and global risk aversion abates).
Oil imports (falling 47.5% YoY) are still the major drag on India’s overall imports but, for the first time in recent history, non-oil imports fell year-on-year (by 0.5%, compared to 31.9% YoY growth in December 2008). The decline in January’s non-oil imports should not be interpreted as domestic goods displacing foreign imports as rupee depreciation hits, but rather viewed as a sign of the slowdown in investment activity that will only reverse in the latter half of 2009.
Going forward, we expect India’s trade deficit to improve, but expect no major positive impact on the rupee until portfolio outflows decelerate i.e., market sentiment improves and global risk aversion abates.