Lower commodity prices to shrink India's trade deficit and help rupee, analysts say

On a month-on-month basis, exports expanded by 7.4% in November, while imports retreated 1.4%, helping the rupee gain

Petroleum products being transported from a refinery in Gujarat. Oil is India’s largest import, and the country has already benefited from a decline in prices. Reuters

The fall in commodity prices could help narrow India's trade deficit in the coming months, aiding the rupee, analysts said on Friday.

India's trade deficit narrowed to $23.9 billion in November from $26.9 billion in the previous month, data released on Thursday showed. It was the lowest trade deficit reading since May.

On a month-on-month basis, exports expanded by 7.4 per cent in November, while imports retreated 1.4 per cent, helping narrow the trade deficit, Barclays Bank said in a note.

"The fall in imports remains a key emerging trend," Rahul Bajoria, chief India economist at Barclays Bank, wrote in the note.

Imports fell to their lowest level in 10 months in November, on lower international commodity prices and weaker domestic demand, Bajoria said.

"We expect this trend to continue and any further decline in commodity prices will only help in a faster consolidation of imports, providing more support to the exchange rate."

Lower commodity prices, especially oil, bode well for India's import bill, reducing the burden on trade deficit, said Swati Arora, economist at HDFC Bank.

"This will eventually be positive for the rupee."

HDFC Bank expects dollar/rupee in 81.50-83.00 range by March. The dollar/rupee is already at the top end of that range at 82.78.

India's current-account funding needs are large, but the balance of payment gap is getting smaller, Barclays' Bajoria said.

With India’s growth expected to ease to 6 per cent in fiscal year 2023-24 from an estimated 7 per cent this year, Mr Bajoria estimates the country's current account to register a smaller deficit of $105 billion on the back of falling crude oil prices.

Barclays expects India's current account deficit for 2022-23 to be at $115 billion or 3.3 per cent of the GDP.

"While India's trade deficit has been moderating on account of the lagged impact of lower commodity prices, the relative importance of demand side factors is likely to increase going ahead," Vivek Kumar, economist at QuantEco Research, said.

If India's economy continues to outgrow most of its key trading partners, then trade deficit could continue to remain "somewhat elevated," Mr Kumar said.