As per the RBI, India's current account deficit fell to an estimated 2.5% of GDP in the March 2011 quarter, from 3.1% in 9MFY11. Driving this is a cut in trade deficit due to (1) a fall in implied oil import volume (Fig 1) and (2) a rise in exports.

● We note that implied Indian oil import volumes have fallen sharply. This 26% YoY fall seems to be an accounting flaw, partly due to non-payments to Iran. If we take last year's volumes on this year's oil price, CAD would increase by US$14 bn (0.8% of GDP).

● Exports started picking up from Nov 2010. We now have a split. The increase - at least in Nov-10 - was limited to a few sectors : metals (50%), transport equipment (likely auto parts, 20%) and cotton + yarn (15%) are together 85% of the incremental growth, but only 25% of total exports.

● Agri exports (mainly cotton), while small, helped the recent surge. Cotton prices in Nov-10 were up only 50% YoY to c.US$120/lb.

In subsequent months, they rose to US$200/lb, and may have played a larger role in export growth till March 2011. They are now down to ~$150. Exports may continue to be strong, but the Nov-10 split does not provide confidence in sustainability. In the absence of trade support, despite a record US$76 bn in fund inflows in FY11 (equity+debt), the Rupee has been weak (except against the USD). This creates a worrying circularity for investors.

Assessing sustenance of the fall in trade deficit

India's current account deficit fell to an estimated 2.5% of GDP in Mar-11 quarter, from 3.1% in 9MFY11. This has been led primarily by reduction in the trade deficit. This, in turn, has been caused by (1) a fall in implied oil import volume and a rise in exports. Oil import value was flat YoY in the March 2011 quarter despite a sharp increase in oil prices, implying that volumes fell 25%.

Simultaneously, FY11 exports were significantly higher than prior peaks, and at US$246 bn - much higher than the trade ministry's target of US$200 bn. YoY exports growth is back to pre-crisis levels.

The pick-up occurred from 3Q11 onwards, in particular from Nov 2010. We attempt to assess sustainability with the Nov 2010 split. Two-thirds of India's exports are manufactured products, which remain flat since March 2010. There has been a spike in agri exports - both cotton and yarn exports have benefited from relaxed export limits and a sharp increase in prices globally.

We note that 97% of the incremental YoY growth in exports in November 2010 came from sectors accounting for only one-third of exports. Of these, commodity exports are 65% of incremental exports.