Fresh trouble for Modi govt: Current Account Deficit widens to 2.9% in September quarter

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New Delhi | Updated: Dec 08, 2018 7:16 AM

A much larger erosion of the reserves ($11.3 billion) was witnessed in the April-June quarter of this fiscal.

Deficit stood at 2.4% in the previous quarter and a benign 1.1% in the year-ago quarter.

India’s current account saw a deficit of $19.1 billion or 2.9% of the gross domestic product (GDP) in July-September quarter (Q2FY19) of this fiscal — the deficit stood at 2.4% in the previous quarter and a benign 1.1% in the year-ago quarter.

The widening of the current account deficit (CAD) was mainly owing to a big merchandise trade gap of $50 billion, up 50% from Q2FY18, which could not be offset by increases in net receipts from services trade and private remittances.

Though the capital account surpluses in Q2FY19 and Q2FY18 were roughly at the same level of $16.3 billion, the former period saw depletion of $1.9 billion from the country’s forex reserves while the reserves enlarged by $9.5 billion in the latter period.

A much larger erosion of the reserves ($11.3 billion) was witnessed in the April-June quarter of this fiscal.

During the April-June quarter, strong outflows in FPI and short term buyer-credit categories (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.

Analysts expect the CAD for FY19 to be roughly at the same level as in the first half. While a sharp increase in crude oil prices and a jump in electronic goods imports had caused merchandise trade deficit to widen in October despite an export rebound, the decline in oil prices over the last few weeks augurs well for the current account in Q3. Also, portfolio inflows turned positive in November amid indications of a less hawkish stance by the US Fed and a softer US dollar, a development that bodes well for the capital account. In fact, net portfolio outflows decreased from $8.1 billion in Q1FY19 to $1.6 billion in Q2FY19.

The RBI said in a statement on India’s balance of payment in Q2 :“Services receipts increased by 10.2% on a y-o-y basis mainly on the back of a rise in net earnings from software and financial services. Private transfer receipts, mainly representing remittances by Indians employed overseas, amounted to $20.9 billion, increasing by 19.8% from their level a year ago.”

Dwelling on the developments in the capital account, it said: “Net foreign direct investment at $ 7.9 billion in Q2 of 2018-19 moderated from $ 12.4 billion in Q2 of 2017-18. Portfolio investment recorded net outflow of $ 1.6 billion in Q2 of 2018-19 –as compared with an inflow of $ 2.1 billion in Q2 last year – on account of net sales in both the debt and equity markets. Net receipts on account of non-resident deposits increased to $ 3.3 billion in Q2 of 2018-19 from $ 0.7 billion a year ago.”

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According to RBI, net FDI inflows in H1 of 2018-19 moderated to $17.7 billion from $19.6 billion in H1 of 2017-18. Portfolio investment recorded a net outflow of $ 9.8 billion in H1 of 2018-19 as against an inflow of $ 14.5 billion a year ago. In H1 of 2018-19, there was a depletion of $ 13.2 billion of the foreign exchange reserves on a BoP basis.

CRISIL Research recently forecast India’s CAD to widen to 2.6% of GDP in this fiscal from 1.9% in the last fiscal, driven by wider merchandise trade deficit. During April-October period of this fiscal, merchandise trade deficit has been $113 billion, $22 billion higher than in the same period last year due to faster growth in imports (17%) than exports (13.6%), it added. According to CRISIL, if the recent decline (~30% since early October) in oil prices sustains, then import growth will soften, but growth in exports still faced headwinds from weaker global trade growth owing to escalating trade wars.

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