Balance of Payments gets FII boost even as current account deficit widens

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Mumbai/new Delhi | Updated: December 9, 2014 1:31:29 AM

India’s current account deficit (CAD) widened to $10.1 billion or 2.1% of gross domestic product...

Reserve Bank of India data released on Monday showed the Balance of Payments (BOP) stood at a surplus for the fourth consecutive quarter; in Q2 of FY14, there was a drawdown of .4 billion. (AP)Reserve Bank of India data released on Monday showed the Balance of Payments (BOP) stood at a surplus for the fourth consecutive quarter; in Q2 of FY14, there was a drawdown of .4 billion. (AP)

India’s current account deficit (CAD) widened to $10.1 billion or 2.1% of gross domestic product (GDP) in the second quarter of the current fiscal from $5.2 billion or 1.2% of GDP in the year-ago-period, due in part to an incipient domestic investment cycle that boosted imports and a muted export growth. In the April-June quarter of this fiscal, the CAD had stood at $7.8 billion or 1.7% of GDP.

However, thanks to copious portfolio inflows — $9.8 billion on a net basis including net inflows of $10.7 billion into the debt market — the country’s balance of payments stood at a surplus of $6.9 billion in Q2 this year. Yet this accretion was lower than the previous quarter’s $11.2 billion, when net portfolio inflows were a more robust $12.4 billion and the merchandise trade deficit was narrower than the Q2 figure of $38.6 billion, at $34.6 billion.

Reserve Bank of India data released on Monday showed the Balance of Payments (BOP) stood at a surplus for the fourth consecutive quarter; in Q2 of FY14, there was a drawdown of $10.4 billion.

CAD

Though the widening of the CAD in Q2FY15 was in line with expectations, some analysts said a sharp revival in domestic consumption/investment demand during the last quarter of the year remained a risk to the CAD. On the positive side, the decline in commodity prices could dampen the pressure on the overall import bill. The analyst community was divided if the recent pick-up in gold imports, aided by festive buying, would be short-lived.

Abheek Barua, consultant at Icrier, said: “The CAD could have been much worse had crude oil prices not cooled off. We need to finance current account deficit through export of goods and services and capital flows which are more permanent in nature than the short term capital flows, depending on which is risky.”

Rupa Rege Nitsure, chief economist at Bank of Baroda, said that there could be a resurgence in gold imports that will in turn widen the CAD.

Bankers do not see a large impact on the currency. “The CAD has shown a marginal rise and it was largely expected. There is unlikely to be any impact on the rupee,” said Ananth Narayan G, regional head of financial markets, South Asia, at Standard Chartered Bank.

Even as foreign investors turned bullish on Indian debt markets, non-resident Indians reduced their dollar investments into bank deposits owing to a cut in interest rates. NRI deposit flows fell to $4.1 billion in July-September from $8.2 billion the same period last year.

A 17% drop in crude oil import bill in H1 this year from the year-ago period, helped by a slide in crude prices, was more than offset by a spike in other imports, partly indicating an incipient investment momentum. Import of petroleum products rose a steep 28% in the first half of this year to $12.2 billion and that of telecom instruments grew at a similar pace to $7 billion.

As per commerce ministry data, gold imports nearly doubled in Q2FY15 to $7.6 billion from the year-ago period which saw the combined crackdown by the government and RBI to drive down imports.

Gold imports, which peaked at $16.3 billion in Q1FY14, had since slid dramatically and remained subdued until earlier this fiscal but started rising again in the build-up to the annual festival and marriage season. Purchases from overseas rose 451% in September to a 15-month high of $3.75 billion and those in October jumped 280% to $4.18 billion. Late last month, the RBI scrapped the 80:20 rule, acceding to the bullion industry’s demand to make supplies even for small jewellers easier. On a half-yearly basis, gold imports still saw a 27% decline — H1FY15 imports were recorded at $14.7 billion compared with $20.2 billion in the year-ago period.

While ICRA expects the volume of gold imports to ease post the festive season, it said the withdrawal of the 80:20 scheme by the RBI might arrest the extent of correction in the quantity of imports.

According to the RBI release, merchandise export growth decelerated to 4.9% in Q2FY15 from 11.9% in Q2FY14 while imports increased 8.1% in Q2FY15 against a decline of 4.8% in the same period last year. Net services receipts improved by an annual 3.4% to $19 billion in Q2 this year.

India’s CAD had widened to a threatening $88 billion or 4.7% of the GDP in FY13, prompting the government to crack down on gold imports. The deficit came down to $32.4 billion or 1.7% of GDP in FY14. Accretion to the reserves was $15.5 billion in FY14 against $3.8 billion in FY13.

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