Current account deficit widens to 2.5% of GDP in Q3 on account of a higher trade deficit

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Updated: Mar 30, 2019 6:42 AM

On a balance of payment basis, the reserves shrank by $4.3 billion in Q3FY19 compared with depletion of $1.9 billion Q2FY19.

CAD, trade deficit, GDP, Nirav Modi fraud, FPI,  current fiscal, Portfolio investmentFPIs have bought shares worth over $7 billion and papers worth $560 million in the March quarter.

India’s current account deficit (CAD) came in at $16.9 billion or 2.5% of the GDP in October-December 2018-19, up from $13.7 billion (2.1% GDP) in the year-ago quarter but lower than $19.1 billion or 2.9% of GDP in the preceding quarter. High merchandise trade deficits due to sluggish exports kept the CAD at relatively high levels in first three quarters of FY19, a period which also saw depletion of India’s forex reserves, given also the relatively lower net inflows into the capital account.

On a balance of payment basis, the reserves shrank by $4.3 billion in Q3FY19 compared with depletion of $1.9 billion Q2FY19. The capital account saw a surplus of only $13.6 billion in Q3FY19, compared with $16.7 billion in the previous quarter and a robust $22 billion in the year-ago quarter, due to the continued weakness in portfolio inflows (net outflow of $2.1 billion in Q3FY19 despite a sequential improvement in debt flows) and the volatility in short-term buyer/supplier credits.

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The capital account, however, is reckoned to have strengthened in Q4FY19. FPIs have bought shares worth over $7 billion and papers worth $560 million in the March quarter. This is the highest purchase by FPIs in both equity and bonds since June 2017. In June 2017, they had purchased a shares and bonds worth $11.9 billion.

During the April-June quarter of the current fiscal, strong outflows in FPI and short term credit (the latter because of the ban on banks issuing letters of undertakings in the aftermath of the Nirav Modi fraud) reduced the surplus in capital account to just $5.4 billion and resulted in a depletion of reserves by a substantial $11.3 billion.
The CAD increased to 2.6% of GDP during April-December 2018 from 1.8% in the year-ago period on the back of widening of the trade deficit.

“The widening of the CAD on a year-on-year basis (in Q3FY19) was primarily on account of a higher trade deficit at $49.5 billion as compared with $44 billion a year ago. Net services receipts increased by 2.8% on a y-o-y basis mainly on the back of a rise in net earnings from telecommunications, computer and information services and financial services. Private transfer receipts, mainly representing remittances by Indians employed overseas, amounted to US$ 18.7 billion, increasing by 6.3% from their level a year ago,” the RBI said in a statement.
In the financial account, net foreign direct investment at $7.5 billion in Q3 of 2018-19 increased from $4.3 billion in Q3 of 2017-18.

Portfolio investment recorded net outflow of $2.1 billion in Q3 of 2018-19 — as compared with an inflow of $5.3 billion in Q3 last year — on account of net sale in the equity market. Net inflow on account of external commercial borrowings increased to $2.0 billion in Q3 of 2018-19 from $0.3 billion a year ago.

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