Trade deficit hits 5-month high in March

By Rajesh Kumar Singh and Manoj Kumar

NEW DELHI (Reuters) - India's trade deficit hit a five-month high in March as merchandise exports fell for a second straight month, making it tougher for policymakers to lift curbs on gold imports that have helped to narrow the country's current account gap.

Asia's third-largest economy, which is struggling through its longest period of sub-5 percent economic growth since the 1980s, is seen vulnerable to any shift in capital flows.

Among the "Fragile Five" emerging economies, India suffered from massive capital outflows last year, in part on concerns over a bloated current account deficit, after the U.S. Federal Reserve signalled a trimming down of its monetary stimulus.

Heavy outflows sent the rupee to a record low in August, prompting authorities to build up foreign-currency reserves and clamp down on gold imports, levying a record 10 percent duty on the yellow metal and linking import volumes with exports.

Trade gap in March widened to $10.51 billion, its highest since October 2013, data from the Ministry of Commerce and Industry showed on Friday. Overseas sales of Indian goods fell 3.15 percent from a year earlier to $29.58 billion in March.

Merchandise exports for the 2013/14 fiscal year, however, grew 3.98 percent on year to $312.36 billion. Together with a 8.11 percent decline in annual imports, that helped sharply narrow the country's full-year trade shortfall to $138.59 billion from $190.34 billion a year ago.

"Extreme caution needs to be taken towards any liberalisation of gold imports because the risks of gold imports rising are very, very active," said Saugata Bhattacharya, chief economist at Axis Bank.

For graphic on India's GDP, industrial output, exports: click http://link.reuters.com/qaw46s

As a result of curbs on gold, annual gold and silver imports dropped 40 percent to $33.5 billion, helping shrink the full-year current account deficit to around $35 billion, 2 percent of GDP, from $88 billion, or 4.8 percent, a year ago.

Gold imports, however, likely jumped last month from around 25 tonnes in February after the central bank allowed more private banks to ship the metal.

CONCERNS

With further easing in curbs expected after national elections in May, gold imports could rise further, exerting pressure on the current account deficit.

Gnanasekar Thiagarajan, director at Commtrendz Research, reckons the import of the yellow metal could double once the restrictions are lifted.

"Indian consumers have been starved of gold lately. They have been discouraged to buy thanks to a premium due to short supply on the back of curbs," he said.

Adding to the deficit concerns is the prospect of a jump in oil imports, which rose nearly 18 percent on year to $15.8 billion in March.

Oil demand is expected to go up if summer monsoon rains fail as farmers would be forced to rely on diesel-run pumps for irrigation.

All this could cause headaches for policymakers as the Federal Reserve winds down its ultra-cheap monetary policy.

Reserve Bank of India (RBI) Governor Raghuram Rajan on Thursday proposed that a multilateral body provide cash to central banks that would ease pressures on countries to build up currency reserves as defenses against any sudden outflows.

Meanwhile, a stronger rupee is eroding the competitiveness of Indian merchandise exports, which contribute nearly 16 percent to the country's gross domestic product.

The rupee touched an eight-month high of 59.5950 on April 2, but has since given up the gains. A rally in domestic shares on the back of heavy foreign buying has helped support the rupee.

The RBI governor told a business daily last week the rupee at 55 to the dollar would be too strong.

(Additional reporting by Suvashree Dey Choudhury and Siddesh Mayenkar in Mumbai; Editing by Jacqueline Wong)