Trade deficit softens in December but watch out for volatility from Red Sea standoff: Nomura

The brokerage's economists said that the effects of these disruptions are likely to be visible from January onwards.

India's trade deficit may be volatile in the coming months given the supply-side disruptions in the Red Sea, said Nomura.

Shipping routes through Suez Canal have been blocked by Houthi rebels who claim to be avenging Israel's attack on Gaza.

In their latest report following the trade-deficit data, the brokerage's economists said that the effects of these disruptions are likely to be visible from January onwards.

Also read: India's goods trade gap narrowed to $19.8 billion in Dec, exports growth turns positive

December data showed that merchandise trade deficit narrowed to $19.8 billion from November's $20.6 billion, thanks to improving export growth (1 percent YoY from November's -2.9 percent YoY) and import growth decelerating further (-4.9 percent from November's -4.3 percent).

Nomura estimates that current account deficit (CAD) will widen to 1.6 percent of GDP in Q4 of 2023 from 1 percent of GDP a quarter ago. Overall, despite the geopolitical tensions, they estimate that CAD will fall to 1.1 percent of GDP in FY24 from 2 percent of GDP in FY23.

The economists see the risk of supply-side disruptions still relevant, particularly with the stand-off at the Red Sea.

"The sharp rise in transit costs and transportation times are likely to hit Indian trade, especially with Europe and the US, with news reports suggesting that some 65% of exports to Europe are now having to use the longer route around the Cape of Good Hope... Surging freight and insurance costs are likely to hit exports, already evidenced by news reports that daily petroleum exports to Europe have fallen by over 70%," the economists wrote.

Europe typically accounts for ~15-16 percent of Indian exports, while the US accounts for ~17-18 percent, they added.

Also read: Red Sea crisis fallout may show up in India's January trade data: Official

While the government seems to be considering measures to help exporters, such as subsidies to offset higher costs and collaborating with the US-led coalition to ensure safe passage in the Red Sea and encouraging exporters to consider alternate markets, importers could still face big challenges.

The report stated, "the rising cost of logistics and a possible escalation in crude oil prices could affect imports".

The economists wrote that, if exports fall sharply while the cost of imports escalates, then the merchandise trade deficit could widen.