June trade deficit narrows, helped by clampdown on gold imports

Last Updated: Fri, Jul 12, 2013 12:03 hrs

India's trade deficit narrowed in June from a 7-month high the previous month, helped by a slowdown in gold imports, but the relief may not last long as low prices and the coming wedding season are expected to bolster demand for the yellow metal.

A lower deficit should ease pressure on India's bloated current account gap, the broadest measure of international trade, and the beleaguered rupee currency.

The deficit narrowed to $12.24 billion from $20.14 billion in May as the growth in gold and silver imports slowed to 22.8 percent year-on-year at $2.45 billion in June.

"With gold imports looking soft, and the non-oil, non-gold trade deficit remaining low, trade deficits are likely to be range-bound in coming months," Barclays Capital wrote in a note after Friday's government data.

A persistent shortfall in the trade account has pushed up India's current account deficit to 4.8 percent of GDP, almost twice the perceived comfort level.

The gap has not only increased India's reliance on overseas funding, but has also hit the rupee the hardest in the ongoing global sell-off in emerging currencies.

The rupee has lost over 8 percent against the dollar so far this year and is the worst performing emerging Asian currency so far this year. It hit an all-time low of 61.21 per dollar last week.

However, the sharp depreciation in the rupee has not helped Indian merchandise exports, which fell 4.57 percent from a year earlier to $23.79 billion, their second straight monthly fall.

Low prices and coupled with the approach of the wedding and festival season are also expected to help a steady rise in gold imports in coming months.

Gold prices in India are down 14 percent from the high seen in late November 2011.

"Sustainability is still the pertinent question," said Radhika Rao, an economist at DBS in Singapore, referring to the moderation in gold imports.

Gold forms an essential part of a bride's dowry in India and is also considered auspicious as a gift or offering at religious festivals. Rural areas make up about 60 percent of demand in the country.

Indian authorities raised the import duty on gold to 8 percent and tightened restrictions on its supplies, alarmed by an annual 109 percent surge in gold and silver imports in April and May combined.

India needs about $85 billion in new foreign investments this fiscal year to fund the current account deficit that is expected to improve to around 4 percent this fiscal year, still way above the country's comfort level of 2.5-3 percent.

Analysts say financing the deficit in a risk-averse global economy will be a challenge, which could add to the pressure on the rupee.

A relentless depreciation in the currency is undermining the steps taken by New Delhi since late last year to revive the economy as it threatens to revive inflation and increase subsidy bill by pushing up the prices of imported goods.

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