Current account deficit at record 5.4% of GDP in Q2

Written by fe Bureau | New Delhi | Updated: Jan 1 2013, 07:25am hrs
India'sS current account deficit (CAD) worsened in July-September to hit a record of $22.3 billion primarily on account of a sharp fall in merchandise exports exports fell $7 billion quarter-on-quarter (q-o-q) and lower services exports. While FII and FDI flows both rose sharply by $5 billion and $9.5 billion respectively on a q-o-q basis the impact of this was lowered somewhat by a $4-billion contraction in NRI deposits between the June and September quarters. Shubhada Rao, chief economist Yes Bank said the CAD stress was likely to persist as exports continue to fall in October and November and services exports flatten.

At this level, the CAD is a record 5.4% of gross domestic product, worse than 4.2% in the same period the previous year. For the nine-month period of April-September, the CAD stood at $38.7 billion or 4.6% of GDP, balance of payments data released by the Reserve Bank of India on Monday showed.

RBI governor D Subbarao had said that a CAD of around 2.5-3.0% is sustainable for the Indian economy. Anything above that has implications for the stability of the external sector.

Exports fell by 12.2% in July-September as compared with a 45.3% growth in the same period the previous year while imports fell marginally by 4.8% compared with a rise of 38.1% in the previous year. The governments decision to hike import duty on gold in June seemed to have not had a big impact as gold imports stood at $10.46 billion, a fall of just $1 billion from the previous quarter.

Owing to the sharp fall in exports and a rather small fall in imports, the trade deficit widened to $48.3 billion from $44.5 billion a year ago.

A small fall in private transfers comes as a surprise, more so since the rupee had depreciated by about one rupee to the dollar between the first and second quarters.

The central bank has been warning time and again about the worsening CAD position and the fact that inflows financing the CAD are rather volatile in nature. Fridays Financial Stability Report pointed to the volatile segment of forex reserves rising to around 81.3% at the end of June. Reflecting the RBIs worry, the financial flows in capital account were just enough to finance the CAD. The balance of payments stood at a surplus of $158 million for July-September.

During July-September, the financial account surplus was $24.24 billion, up from $19.01 billion a year ago, largely due to higher foreign direct investment.

Net FDI flows rose to $8.9 billion, up from $6.5 billion a year ago while the more volatile portfolio flows were $7.6 billion, up from $1.4 billion a year ago. Inflows including ECBs and bank capital fell to $3.3 billion from $9.5 billion a year ago.

The RBI has often indicated that it prefers FDI flows to the more volatile FII flows for financing CAD. It had also said it prefers non-debt flows to debt flows. However, the cap on investment by FIIs in debt has been hiked twice in the current year and a special category of investors, qualified institutional investors, has also been created.