By Rajesh Kumar Singh
NEW DELHI (Reuters) - Lower oil prices helped India's trade deficit narrow in August, auguring well for its current account balance at a time when speculation on U.S. interest rates has boosted volatility in emerging currencies.
The trade deficit shrunk to $10.84 billion last month from a 12-month high of $12.23 billion in July as falling crude prices reduced the oil import bill by nearly 11 percent.
Asia's No. 3 economy imported oil worth $12.84 billion in August, down nearly 15 percent year-on-year and lower than $14.35 billion in the previous month.
Brent crude oil slumped on Monday to its lowest in more than two years, below $97 per barrel, as lacklustre economic data from China, the world's top energy consumer, cast a shadow over the outlook for oil demand at a time of abundant supply.
India imports nearly 80 percent of its oil needs and falling crude prices give it more leeway with fuel subsidies, helping trim its twin deficits and thereby putting it in a better position to deal with fallout from any increase in U.S. rates.
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"By all means, this is a positive news and will further bolster investor confidence in India," Capital Economics analyst, Shilan Shah, said. "Financial markets may see bouts of volatility from time to time, but India's external vulnerability has decreased considerably since last year."
The rupee hit a one-month low and saw its biggest single-day decline in nearly one-and-a-half months on Monday as part of a global sell-off in emerging currencies as investors braced themselves for the outcome of the Fed's Sept. 16-17 meeting.
The Indian currency was in freefall last summer when talk of the Fed trimming its monetary stimulus led to massive capital outflows from emerging economies.
India has since taken action with a slew of measures to slim down its current account deficit and increase foreign exchange reserves to avoid a re-run of the crisis.
Curbs on gold imports, such as higher duties, helped dramatically narrow the current account deficit to 1.7 percent of gross domestic product in the fiscal year that ended in March from 4.7 percent a year earlier.
While those restrictions have led to more smuggling, the government is reluctant to lower duties and gold imports almost tripled from a year earlier to hit $2.04 billion in August.
Encouragingly, non-oil and non-gold imports also picked up during the month, providing further evidence of a nascent revival in the economy that is struggling to make a sustained recovery from its longest stretch of sub-par growth in decades.
"This suggests domestic investments are improving and that's good for India's long-term growth," Shah said.
Overall imports grew 2.08 percent year-on-year in August to about $38 billion.
Merchandise exports, meanwhile, grew for a fifth straight month to $26.96 billion in August but the annual growth rate slowed to 2.4 percent from 7.3 percent in July.
(Editing by Louise Ireland)