Trade deficit likely to stay high and indicates strong underlying demand despite high inflation

India's trade deficit shot up to $31 billion in the month of July and this was an increase of $4.84 billion over June.  With this reading, it has hit an all-time high and crossed the $100 billion mark in the first quarter of the current financial year.

The high trade deficit data from July seems to indicate that the current account deficit in the current year can go well over 3.5 percent of GDP, which is a worry for the RBI and it may take this into consideration when the August policy is announced tomorrow.

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In an interview with CNBC-TV18, Parul Mittal Sinha, Head of Financial Markets-India and Head of Macro Trading-South Asia at Standard Chartered Bank, and Pranjul Bhandari, Chief India Economist at HSBC spoke at length about all the possible cues that the RBI will watch and what it will do.

The trade deficit may remain high at USD 25-27 billion this fiscal, according to Bhandari.

“Trade deficit is something to worry about as USD 31 billion number was on the back of a fall in oil exports because taxes have been raised. They have been reduced since, so there could be some mean reversion - that's good, but it also came from core export volumes slowing, and also imports remaining high and sticky, which could remain in the system for longer," she analyzed.

Meanwhile, Sinha believes that the trade deficit reading shows that the underlying demand in the economy is still strong.

"Even though inflation has cooled off from a high of 7.8 percent that we saw earlier this year, we are hovering around 7 percent and it can go down towards 6.5 percent, but the risk of demand staying strong and therefore filtering into core inflation remains in place and that factor might be RBI’s decision towards 50 basis point hike over 35 bps hike,” she said.