Balance of payments: Q1 current account deficit at 2 per cent, yet $14 billion added to reserves

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Updated: October 1, 2019 7:06:07 AM

For FY19 as a whole, the CAD had stood at $57.3 billion (2.1% of GDP) as the first three quarters of the year saw the CAD at elevated levels.

Of course, the Q1FY20 deficit was narrower than in the year-ago quarter when it was .8 billion or 2.3% of GDP.

India’s current account deficit (CAD) came in at $14.3 billion or 2% of the GDP in Q1FY20, much wider than the 10-quarter low of $4.6 billion (0.7%) in the previous quarter, owing to a yawning merchandise trade deficit of $46.2 billion. But there still was accretion of a considerable $14 billion to foreign exchange reserves in the June quarter, roughly the same level of addition in the March quarter, thanks mainly to robust net FDI inflows ($13.9 billion) that boosted the capital account.

Of course, the Q1FY20 deficit was narrower than in the year-ago quarter when it was $15.8 billion or 2.3% of GDP.
What reined in the CAD in the June quarter were also high invisible receipts of $31.9 billion, with both services exports and private remittances remaining strong.

The CAD is believed to have not widened in the September quarter despite a lowering of export growth as imports slowed sharply too, mirroring domestic demand compression.

Merchandise exports grew just 2.2% in July and it actually shrank 6.1% in August; still, the goods trade deficit in the two-month period was only around $26.5 billion. As for capital account, there are concerns as foreign portfolio investors pulled out $3 billion from Indian equities during the September quarter.

Releasing the Q1FY20 balance of payment data on Monday, the RBI said: “Net services receipts increased by 7.3% on a y-o-y basis, mainly on the back of a rise in net earnings from travel, financial services and telecommunications, computer and information services. Private transfer receipts, mainly representing remittances by Indians employed overseas, rose to $19.9 billion, increasing by 6.2% from their level a year ago…. Foreign portfolio investment recorded net inflow of $4.8 billion in Q1 of 2019-20 – as against an outflow of $8.1 billion in Q1 of 2018-19 – on account of net purchases in both debt and equity markets”.

For FY19 as a whole, the CAD had stood at $57.3 billion (2.1% of GDP) as the first three quarters of the year saw the CAD at elevated levels. The first three quarters of last fiscal saw depletion of the reserves, aggregating $17.5 billion and as a result, during the year as a whole, the forex reserves depleted by $3.3 billion.

“Net inflow on account of external commercial borrowings to India was $ 6.3 billion in Q1 of 2019-20 as against an outflow of US$ 1.5 billion a year ago. In Q1 of 2019-20, there was an accretion of US$14.0 billion to the foreign exchange reserves (on BoP basis) as against a depletion of US$ 11.3 billion in Q1 of 2018-19,” the RBI added.

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