27% drop in merchandise trade deficit implies demand is weak.

Mumbai: There was a time when trade deficit narrowed, it led to celebrations. But this time, it is adding to the worries on the economy front. While the trade deficit, excess of merchandise imports over exports, fell to a seven-month low, the fact that it is driven more by lower non-oil imports shows that the aggregate demand in the economy remains weak.

Of course, it is helping ease the pressure on the currency amid outflow from portfolio investors and led to the rupee gain close to a percentage point to the US dollarNSE 0.43 %. The current account deficit (CAD) for the September quarter could be lower as the merchandise trade deficit contracted 27 per cent during the quarter.

India’s September merchandise trade deficit hit a sevenmonth low of $10.86 billion as against $14.95 billion in September 2018, contributed by contraction in both imports as well as exports during the month.

An analysis of the trend in the movement of the Indian rupee vis-à-vis the US dollar shows that the rupee gained 0.75 per cent in September to end at Rs 70.87 on September 30, from Rs 71.34 the earlier month.

India’s foreign exchange reserves also rose by $5 billion during the month to $433.5 billion by the last week of September, mostly contributed by the foreign direct investment and renewed borrowing in the overseas markets due to the tight domestic credit market.

Moreover, the second-quarter current account deficit could end up much lower than last year’s level as the merchandise trade deficit fell 27 per cent over the previous comparable period. It was 2.4 per cent of the GDP in the quarter ended September 2018.

So long as the domestic demand and global crude oil prices remain weak, trade deficit might continue to contract, say analysts.

“A weak domestic demand is likely to keep imports tepid,” said a report by Edelweiss Research. “However, some signs of stabilisation in the global economy as a result of monetary easing by global central banks are visible. Hence, exports could bottom out sooner rather than later, and we do not expect India’s trade balance to deteriorate significantly.”