India’s April 2009 exports fell 33.2% yoy, while imports fell 36.3% (non-oil imports fell 24.6%, compared to a 58.4% fall in oil imports): India’s trade data for April released today continues to validate our forecasts that India’s imports would fall faster than exports in the 1H of calendar 2009 narrowing the trade deficit. We hold on to our belief that in 2H 2009 imports will recover faster than exports widening the trade deficit again, as India’s growth accelerates faster than that in most of the world, and global commodity prices recover.
Implications for our Rupee View: We maintain our March 2010 Rs/US$ forecast of 45. In the past several weeks, more than the narrowing trade deficit, it is strong portfolio investment inflows that strengthened the rupee (i.e. from ~52 Rs/US$ at its March lows to ~47 today), and it is portfolio flows that will further strengthen the rupee to 45. Why aren’t we forecasting a more dramatic appreciation by March 2010? Because, in addition to a widening trade deficit in 2H2009, we believe capital flows like FDI and commercial borrowings will be less robust than portfolio flows in 2009. The 27% appreciation of the rupee in FY08 was thanks to US$100 billion in capital flows that year. We do not think capital flows will touch that level in FY10. Moreover, although oil prices may not touch their 2008 highs in the near future, we believe that commodity price trends over the next six months will be less benign for the rupee than they have been in the last six months.