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CAD narrows sharply to 0.1% of GDP

Thanks primarily to a lower (down over $9 billion) merchandise trade deficit but also due to a decline in services receipts and remittances, India’s current account deficit (CAD) narrowed sharply to $0.3 billion or 0.1% of gross domestic product (GDP) in Q1FY17, compared with $6.1 billion (1.2% of GDP) in the corresponding quarter last year.

By: | New Delhi | Updated: September 22, 2016 5:05 PM
Many analysts, however, were expecting the current account to be in surplus in the June quarter after the sharp decline in deficit in the previous quarter, when, too, it came in at 0.1% of GDP. (Reuters) Many analysts, however, were expecting the current account to be in surplus in the June quarter after the sharp decline in deficit in the previous quarter, when, too, it came in at 0.1% of GDP. (Reuters)

Thanks primarily to a lower (down over $9 billion) merchandise trade deficit and despite a decline in services receipts and remittances, India’s current account deficit (CAD) narrowed sharply to $0.3 billion or 0.1% of gross domestic product (GDP) in Q1FY17, compared with $6.1 billion (1.2% of GDP) in the corresponding quarter last year.

Many analysts, however, were expecting the current account to be in surplus in the June quarter after the sharp decline in deficit in the previous quarter, when, too, it came in at 0.1% of GDP.

Despite net FDI inflows moderating to $4.1 billion (from $10 billion in Q1FY16 and $8.8 billion in Q4FY16), the narrower CAD coupled with a flat banking capital number (swinging back from a negative $9 billion in March quarter) helped the balance of payments to be in surplus in Q1 this year: The accretion to reserves was close to $7 billion. Anubhuti Sahay, economist at Standard Chartered Bank, observed that the slowdown in remittances and services exports — both at lowest levels since 2011 — reflected weak external demand.

Portfolio investment recorded a net inflow of $2.1 billion in Q1FY17 against an outflow of $1.5 billion in the year-ago quarter and marginal inflow ($223 million) in the previous quarter. Net services receipts stood at $15.8 billion in the quarter under review against $17.8 billion in the year-ago quarter while private transfers, owing to low crude oil prices that hit remittances from West Asia, declined to $14.2 billion versus $16.3 billion in the year-ago quarter.

On the capital account front, the country’s capital account surplus, while falling 61.89% (y-o-y), more than doubled sequentially to $7.1 billion, the primary reasons being higher portfolio investment into both debt and equity, which rose 11.25% and 11.62%, respectively.

The primary reason for the drop in the CAD was merchandise imports falling 11.5% (y-o-y) to $90 billion, which more than offset the 2.1% (y-o-y) drop in merchandise exports to $66.6 billion. On a sequential basis, while the country’s merchandise exports rose 1.2%, merchandise imports dropped by 0.14%. Services trade, however, put a lid on the improvement in the CAD with the growth in services imports outpacing that of services exports both sequentially and year-on-year. While the country’s services exports grew 3.3% (y-o-y) in the June quarter to hit $39.5 billion, services imports grew 15.9% (y-o-y) to $23.8 billion during the quarter. Even sequentially, while services exports grew 0.3%, imports grew at a much faster 1.84%.

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