New Delhi: The trade deficit narrowed in September to a 6-month low but the prospect of higher crude oil prices could again widen the gap, the trade secretary said on Monday.

The goods trade deficit has ballooned in the past few months as Asia’s third-largest economy imports large quantities of iron and steel, chemicals and machinery to fuel a rebound in industrial growth.

The trade deficit can exacerbate India’s current account deficit, and adds to the need for India to attract fund inflows to finance the gap.

Policymakers have said the deficits were matters of concern but manageable but some have said the shortfalls make it easier for India to absorb a surge in inflows of capital - the product of super-loose monetary policy in advanced economies.

“I still think that there is a problem, I think that we cannot carry on having large goods trade deficits," trade secretary Rahul Khullar said.

“The numbers that are coming in now, they’re still serious, but it’s not something to get up and start ringing alarm bells about," he added.

Slower import growth in September caused the trade deficit to shrink but Khullar predicted the figure would likely hover around the $10 billion mark on average in the coming months, noting that oil prices are forecast to rise.

The current account deficit was about 3.7 % of gross domestic product in the June quarter.

“As long as the current account deficit remains within the neighbourhood of 2.5 to 3%, you are not in any serious difficulty," Khullar said.


The exports have risen this fiscal year in most sectors including oil, plastics and iron ore, thanks in part to higher prices and the base effect of weaker year-ago numbers, Khullar said.

However, an appreciating rupee would hit exports when new orders are placed in the coming months, he added.

The trade deficit in September stood at $9.12 billion, compared with August’s $13.06 billion, which was a 23-month high. It was the narrowest deficit since March’s $7.83 billion figure, but higher prices of oil that the country imports could widen the deficit once again.

Khullar said the trade deficit was likely to average around $10 billion to $10.5 billion a month for the rest of the fiscal year.

The Indian rupee has gained nearly 5 % since the beginning of the year, part of a broad rise in emerging market currencies as investors pump in funds in search of higher returns.

“We don’t see that we have reached a stage where the rupee can be termed as volatile," trade minister Anand Sharma told reporters at a separate event on Monday.

Khullar has said the trade deficit could touch $135 billion for the year to end-March 2011.

Exports in September rose an annual 23.2% to $18.02 billion, while imports for the month grew 26.1%on the year to $27.14 billion, Khullar said.

Sharma said the country is on track to meet its 2010/11 export growth target of close to 15%.

Exports dropped 4.7% in the previous fiscal year as the global financial crisis-led slowdown crimped demand.