India`s trade deficit expected to widen

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India's trade deficit is forecast to widen in the 2010/11 fiscal year as its rebounding economy raises demand for manufacturing and oil imports, while the euro zone debt crisis hits exports, mainly in software.

A wider deficit would pressure the partially convertible rupee, which has lost more than 5% from its 2010 peak of 44.18 to the US dollar.

India's trade deficit was USD 117.3 billion in 2009/10, down from USD 118.7 billion in 2008/09. But a Reuters survey in April forecast the gap would widen to USD 132.70 billion in 2010/11 and USD 154.50 billion in 2011/12.

Below are scenarios on India's trade deficit:

Euro zone debt crisis settles, helping exports, positive for rupee, stocks:

Probability: High

An easing euro zone crisis would support demand for exports to the European Union and resulting confidence in emerging market assets could help both Indian stocks and the rupee.

EU finance ministers have agreed on a financial safety net of USD 1 trillion for bloc members to restore confidence.

"This is a temporary flight to safety," said Sajjid Chinoy, an economist with JPMorgan in Mumbai, referring to foreign portfolio outflows in May. "There is enough liquidity globally looking to come to emerging markets and India is one of them."

Foreigners pulled USD 2 billion from Indian stock markets in May as risk aversion heightened on fears of a Greek debt default. An easing of skittishness in global markets has encouraged foreign investors to plough back about USD 2.3 billion into Indian stocks in June.

Oil prices rise, add to import bill, widen trade deficit, weaken rupee:

Probability: Moderate

India imports more than two thirds of its oil needs and any price spike add to its bill and widens the trade deficit.

"With current oil prices and our expecation that average crude oil prices will be closer to USD 82 per barrel, we expect the oil import bill to remain at manageable levels in FY11," said Anubhuti Sahay, an economist at Standard Chartered in Mumbai.

Oil imports in 2009/10 were USD 85.5 billion, lower than USD 93.7 billion in 2008/09. Domestic crude refiners are the biggest importers and dollar demand from them usually peaks at the end of every month, pressuring the rupee.

"However, should the oil prices spike, it will inflate the oil import bill. Our analysis indicates that every increase of USD 1 per barrel in Indian crude basket prices pushes up the annual import bill by USD 1.2 billion," said Sahay.

Euro zone crisis worsens, widens trade deficit by crimping exports, weakens rupee, stocks:

Probability: Low

The chances of the euro zone debt crisis deteriorating have lessened a lot from May, when worries of a Greek debt default shook world markets.

The EU accounts for a fifth of India's exports and if the crisis there is prolonged or takes a turn for the worse, it could widen the trade deficit by hurting demand from the 27-nation bloc.

"Exports look better than last year. But they will receive some setback because of euro zone. There won't be a huge contagion, but global demand will weaken for our exports," said Rupa Rege Nitsure, chief economist at Bank of Baroda.

The EU accounted for just over a fifth of India's exports in April-October 2009, central bank data shows. By comparison, Asia accounted for 28% and North America for 11.9%.

"It would be whether the risk aversion theme is back or not. I am of the view the euro zone is in serious stress and the world is not an as settled place than it was before 2008," Ashish Vaidya, head of trading for fixed income, currencies and commodities at UBS in Mumbai.