Evidence suggests that over a period of time, global demand is relatively more important for export growth than rupee depreciation-Crisil Research

CAD to remain low in Q3 FY14

Merchandise trade deficit widened slightly in December 2013 to US$ 10.1 billion from US$ 9.2 bn in November. Overall, trade deficit for Q3 FY14 (October to December 2013) at US$ 29.9 bn is at the same level as in Q2 FY14. Given this, and with service export growth in Q3 expected to be at least similar to that in the second quarter (in line with global recovery), India's current account deficit is expected to remain close to the level seen in Q2 FY14 (1.2% of GDP).

Imports continued to contract sharply in December (-15.2 per cent y-o-y) as weak domestic demand and restrictions on gold imports lowered non-oil imports by nearly 23 per cent y-o-y. Oil imports rose slightly by 1.0 per cent reversing the fall seen last month.

Export growth slowed for the second consecutive month in December to 3.5 per cent from 5.9 per cent in the previous month.

Detail data for November shows that the slowdown in export growth had come from a sharp drop in transport equipment exports (6.6 per cent y-o-y from 79.3 per cent in October), and growth in textile and machinery and instruments exports also moderated.

Exports growth likely to remain robust next year

Evidence suggests that over a period of time, global demand is relatively more important for export growth than rupee depreciation. For example, higher growth in advanced economies pushed up export growth during FY04 - FY08, despite a stronger rupee. The global economy is expected to grow at a faster rate of 3.6 per cent in 2014 from 2.9 per cent in 2013 (IMF). Therefore, in addition to weak rupee, global recovery will provide impetus to export growth in the coming months.

On the import side, consumption goods import may pick up as household consumption improves. A revival in household demand would be supported by higher farm incomes due to a good monsoon.

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