Current account shows surplus balance in 2 years

After showing a steady deficit for the last two quarters, the current account has now shown a surplus balance for the first time in two years, for the quarter ended March 31, 2009.

The current account balance has witnessed a turnaround recording a surplus of $4.7 billion during the quarter due to lower trade deficit and sustained support from surplus in invisibles account.

?We had expected a surplus position as there has been a narrowing of trade deficit. Exports have been on a lower side and we expect this trend to continue until the economy revives,? noted Bank of Baroda chief economist Rupa Rege Nitsure.

However, she added that this is a temporary phase whereby once the economy picks up as the industrial production and growth start showing positive signs, the economy will once again run into a deficit, which is likely to happen during the second half of the financial year.

On a balance of payment basis, the country?s merchandise exports have recorded a sharp decline of 24.2% in last quarter of 2008-09 as against an increase of 47.2% in the corresponding quarter of 2007-08, which can be attributed to a more synchronised global economic downturn.

In the quarter ended October-December 2008, with both current and capital accounts running into deficit, the balance of payments account deteriorated sharply.

The contraction in exports resulted in the current account deficit widening to $14.6 billion in October-December 2008, the highest quarterly deficit since 1990, from $4.53 billion in the previous quarter.

A study by DBS group research said that they expect the government to target a deficit of 6.5% of GDP for financial year 2009-10, wider than the 5.5% target set in the interim Budget in February, thereby forecasting 7% and 11% growth in real and nominal GDP in FY09.

?In the meantime, widening fiscal and trade deficits make us wary of stability risks in the short-run, especially as oil prices continue to climb. A ratings downgrade would be unavoidable if the government doesn?t liberalise oil prices,? it added.

Meanwhile, the net outflows in the capital account as witnessed in the third quarter of 2008-09 continued during the last quarter of 2008-09 mainly due to net outflows under portfolio investment, banking capital and short-term trade credit.

The nation?s external debt has increased 2.4%, or $5.3 billion, to $229.9 billion as of March 31, 2009, the data from central bank showed.

Besides, the foreign exchange reserves, including the valuation effects, have declined by $57,738 million during 2008-09 as against an increase of $110,544 million during 2007-08.

The valuation loss, reflecting the depreciation of major currencies against the dollar, accounted for $37,658 million during 2008-09 as against a valuation gain of $18,380 million during 2007-08. Accordingly, valuation loss during 2008-09 accounts for 65.2% of the total decline in foreign exchange reserves. Apart from the current account deficit, outflows under portfolio investments, banking capital and short-term trade credits were the other major sources contributing to decline in foreign exchange reserves during 2008-09.

At the same time, the country?s external debt, as on March 2009, stood at $229.9 billion, which is 22% of the GDP, recording an increase of $5.3 billion or 2.4% over the level of the previous year mainly due to the increase in trade credits.

?By way of composition of external debt, the share of commercial borrowings was the highest at 27.3% as at end of March 2009 followed by short-term debt at 21.5%, NRI deposits at 18.1% and multilateral debt at 17.2%,? noted the RBI.

Excluding the valuation effects due to appreciation of US dollar against other major currencies and Indian rupee, the stock of external debt would have increased by $18.7 billion as compared with the stock as at end-March 2008. The share of short-term debt in total debt increased to 21.5% at end-March 2009 from 20.9% at end March 2008, primarily on account of rise in short-term trade credits.

Based on residual maturity, the short-term debt accounted for 40.6% of the total external debt at end-March 2009.

Foreign exchange reserves provided a cover of 109.6% to the external debt stock at the end of March 2009 as compared to 137.9% at the end of March 2008.