After a long period of relative comfort, worries seem to re-emerge on the country’s current account front. In the July-September quarter of the current fiscal, the account ran a deficit of $9.6 billion or 1.3% of the gross domestic product (GDP), the largest since the first quarter of FY20, RBI said on Friday. Analysts foresee a much wider deficit in the December quarter, even as capital inflows thinned.
A large capital account surplus – $40 billion – enabled by SDR allocation of $17.9 billion by the IMF – more than offset the current account deficit in Q2FY22. On a balance of payment basis, there was net accretion of a solid $31.2 billion to the forex reserves in the quarter, almost the same level as in the year-ago period, when the current account had a surplus of $15.5 billion.
Of course, the current account surpluses in some of the recent quarters were caused by a slowing of imports, which reflected reduced demand for goods in the pandemic-hit economy, rather than any structural improvement.
Aditi Nayar, chief economist at Icra, said: “The current account deficit in the second quarter (of FY22) was somewhat smaller than our expectation. Nevertheless, a huge widening lies ahead, with the large merchandise trade deficits seen in October-November 2021.”
She expects the current account deficit to print in excess of $25 billion in the third quarter of FY22, rivalling the size of the full-year CAD in FY20 (pre-Covid). For the entire FY22, Nayar projected the CAD at $40-45 billion, or around 1.4% of GDP.
RBI said: “The deficit in the current account in Q2-2021-22 was mainly due to widening of the (merchandise) trade deficit to $44.4 billion from $30.7 billion in the preceding quarter and an increase in net outgo of investment income.”
In fact, a sustained surge in import bill – driven substantially by elevated oil prices and gold purchases, and a release of pent-up demand during the festive season — have inflated the goods trade deficit considerably in recent months, particularly since September. In the first two months of the December quarter, the deficit spiked to as much as $42.6 billion, way above that of $19.3 billion a year before.
At the same time, foreign portfolio investors (FPI) remained net sellers in the December quarter, having pulled out shares and notes worth $6.4 billion, Bloomberg data showed. So, the financing of the wider CAD expected in December quarter appears difficult. While FPIs offloaded equities in every month of Q3FY22, November witnessed a marginal buying in bonds to the tune of $ 153.68 million. During the quarter, FPI withdrawn $1.7 billion from debt and $4.7 billion from equities.
RBI added: “In the financial account, net foreign direct investment recorded an inflow of $ 9.5 billion (in Q2FY22), lower than $24.4 billion a year ago. Net foreign portfolio investment in the quarter was $3.9 billion as compared with $7.0 billion in Q2FY21.”
“India recorded a current account deficit of 0.2% of GDP in H12021-22 as against a surplus of 3% in H12020-21 on the back of a sharp increase in the trade deficit.”