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  1. Cheaper oil helps narrow current account deficit to $1.3 bn

Cheaper oil helps narrow current account deficit to $1.3 bn

India's current account deficit (CAD) narrowed to $1.3 billion or 0.2% of gross domestic product (GDP) in January-March compared with $8.3 billion the previous quarter, as lower oil prices shrank the import bill by 13.4%.

By: | Published: June 11, 2015 1:04 AM

India’s current account deficit (CAD) narrowed to $1.3 billion or 0.2% of gross domestic product (GDP) in January-March compared with $8.3 billion the previous quarter, as lower oil prices shrank the import bill by 13.4%.

The country’s balance of payments recorded a quarterly surplus of $30.1 billion, helped by robust capital inflows and the narrow CAD, data from the Reserve Bank of India showed. This was the sixth consecutive quarter of surplus.

The CAD for the full year too reduced to $27.52 billion or 1.3%of GDP, from $32.36 billion or 1.7% of GDP the previous year. The CAD has narrowed for the second straight quarter now. While the trend of decline in imports and consequent narrowing of the merchandise trade deficit seemed to continue into the current quarter and augured well for the current account, as far the capital side is considered, there is some reason for worry as net portfolio inflows (FPI) have been in the negative in May and up to now in June.

While net FPI/FII inflows were R78,975 crore in January-March, these have been minus R2,500 crore so far in the current quarter. The sharp fall in imports owing to an 2.3% fall in international oil prices during January-March and a muted growth in gold imports helped the country’s external position.

Merchandise trade deficit for the January-March period stood at $27 billion, much lower than around $40 billion in the previous three-month period. However, a fall in exports is worrisome. The decline in exports has been attributed to low demand in trade partners owing to a slowdown in most advanced economies. A stronger rupee in comparison to other currencies has also dampened exports by eroding competitiveness.

The rupee has weakened by just 1.2% so far in 2015 even as competitive emerging market currencies have fallen by as much as 8%. The currency is overvalued by around 11% in real effective exchange rate terms, which measures competitiveness of the rupee. Nevertheless, given the high returns of Indian equities and bonds, foreign portfolio investment flows were $12.4 billion during the quarter, the biggest contributor to the BoP (balance of payments) surplus.

Inflows from foreign direct investment (FDI) were $9.6. A massive 48% fall in crude oil prices during 2014-15 led to a 19% fall in the oil import bill to $164.8 billion for the year. But this was offset by a 19% rise in gold imports to $34.44 billion in 2014-15, indicating that investment into the yellow metal is still strong.

Gold imports had been declining from their peak of $16.3 billion in Q1of FY14 but have bounced back  over the last two quarters. In order to dampen gold demand, the government proposed a monetisation scheme last month and invited suggestions on the same. The country’s CAD of had been an unsustainable 4.7% in FY13, prompting the government and the RBI to crack down on gold imports. Measures had included several hikes in import duty on the metal along with restrictions on the quantum of imports as well.

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