UPDATE 1-Sharply lower Sept trade gap bright spot for India's ailing economy

NEW DELHI Wed Oct 9, 2013 1:01pm IST

NEW DELHI Oct 9 (Reuters) - India's trade deficit narrowed to a two-and-a-half-year low in September, raising hopes for a significant reduction in the country's gaping current account deficit, which helped send the rupee to record lows in recent months.

India's trade deficit narrowed to $6.7 billion last month, compared with $10.9 billion in August and the lowest since March 2011, the trade ministry said.

"The government has taken conscious steps to curtail imports of non-essential commodities, essentially precious metals. That is working out as the government intended," said India's top trade civil servant, S.R. Rao.

In the last fiscal year India posted a whopping $88 billion deficit on the current account, the third largest in the world, raising fears of a balance of payments crisis. The rupee crashed as much as 20 percent between May and August.

The currency has since recovered slightly and Finance Minister P. Chidambaram is confident the current account deficit will narrow to under $70 billion for the fiscal year to March 2014.

Exports jumped an annual 11.15 percent in September thanks to stronger demand from Western nations and increased competitiveness thanks to the weaker rupee. The currency weakness, along with measures to reduce gold buying, helped tame imports, which fell 18.1 percent in the month.

New Delhi has taken a slew of steps including fiscal incentives for its exporters to improve the deficit. It has also raised import duty on gold shipments to a record 10 percent, and made airline passengers pay duty on imports of flat-screen televisions.

The import bill on gold and silver shipments, one of the biggest items after petroleum and crude products in the country's import basket, moderated to $800 million in September.

FESTIVE BLUES

However, economists warned that trade data in the coming months could be slightly less rosy because of an expected surge in demand for jewelry as India enters its peak festive season later this month.

"The September data has come as a big positive surprise. However, we do not expect such a trend to continue given that seasonally the ongoing quarter tends to witness a higher trade deficit," said Upasna Bhardwaj, an economist at ING Vysya Bank in Mumbai.

The Indian rupee, shares, and benchmark bonds gained after Wednesday's data.

The rupee strengthened to 61.9650 per dollar at 0625 GMT from around 62.10 before the data, though it remains down about 11 percent so far this year.

The current account deficit (CAD) for the three months through June was $21.8 billion, or 4.9 percent of gross domestic product, driven by sluggish exports and high gold imports in April and May before the government hiked tariffs on the metal.

Saugata Bhattacharya, chief economist at Axis Bank in Mumbai predicted that deficit could narrow or even become a surplus in the September quarter, before widening again during the festive season.

"But overall, we still may end up with an encouraging current account deficit number of $50-$60 billion for the full year which may give the RBI some comfort to cut the MSF (marginal standing facility) rate further. The RBI may have been led by the better-than-expected trade deficit number to cut the MSF rate this week."

India's central bank cut an overnight interest rate on Monday by 50 basis points to increase market liquidity. The bank had raised the interest rate in July in a bid to shore up the rupee. (Additional reporting by Mumbai newsroom; Writing by Rajesh Kumar Singh; Editing by Frank Jack Daniel & Kim Coghill)

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