March Trade Data Yet To Reflect Full Impact Of Ukraine War: Nomura

India's trade deficit rose 88 per cent in the 2021-22 fiscal year, but that data is yet to reflect the full impact of the Russia-Ukraine war, noted analysts at Nomura.

"March trade data are yet to reflect the full impact of the Russia-Ukraine war. The full impact on trade to be visible in Q2 (current quarter), reflecting rising commodity prices, frayed supply chains, and domestic normalisation," Nomura's analysts wrote in a research report.

"The Russia-Ukraine war only had a limited impact on the external sector in March. The trade deficit moderated, despite higher oil prices, due to stable export performance and a sharp drop in gold imports," said the report.

The trade deficit rose to $192.41 billion in 2021-22 as against $102.63 billion in the previous year, widening by 87.5 per cent, showed the government data on Monday.

While total exports during the last fiscal year increased to a record high of $417.81 billion, imports too soared to $610.22 billion, leaving a trade gap of $192.41 billion.

We expect the full impact on trade to be evident in Q2 (current quarter), reflecting rising prices of oil and broader commodities, frayed supply chains, and domestic economic normalisation. We expect the current account deficit to widen to 3.8 per cent of GDP in FY23 (year ending March 2023) from our expectation of ~1.6 per cent of GDP in FY22, adding external risks to pre-existing inflation and fiscal ones," said the analysts.

India's external account - both the current account and the balance of payment (BoP) - deteriorated during the December quarter to a surge in crude oil prices and a record pullout by foreign institutional investors.

Indeed, the current account deficit (CAD) zoomed to $23 billion or 2.7 per cent of gross domestic product (GDP) in the quarter ended December 2021 from $9.9 billion or 1.3 per cent of GDP in the prior quarter, according to data released by the Reserve Bank of India (RBI) on Thursday. 

That data was for a period before the escalating Russia-Ukraine war, which has pushed oil prices to multi-decade highs, with Brent above $100 barrel since Russia invaded Ukraine on February 24.

"March trade data were the first month to reflect the headwinds from the Russia-Ukraine war and the commodity price flare-up, although the fuller extent of the impact will only materialise over the coming months," said the note.

"Looking ahead, we expect the trade deficit to remain elevated. Typically, a 10 per cent rise in global crude oil prices widens India's current account deficit by 0.3 per cent of GDP. The broader rise in commodity prices, including fertilisers, natural gas, coal, metals, edible oils, is also likely to impact imports negatively," added Nomura analysts.