India’s current account deficit shrinks to 0.9% of GDP in Q2

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Published: January 1, 2020 6:15 AM

The CAD narrowed to 1.5% of GDP in H1FY20 from 2.6% in H1FY19 on the back of a reduction in the trade deficit which shrank to $84.3 billion in H1FY20 from $95.8 billion in H1FY19, the RBI added.

In Q2FY18, the accretion to reserves were just $1.9 billion.In Q2FY18, the accretion to reserves were just $1.9 billion.

India’s current account deficit (CAD) shrank sharply in the September quarter to $6.3 billion or 0.9% of the gross domestic product (GDP) from 2% in the preceding quarter and 2.9% in the year-ago quarter, as a steep decline in imports reined in the merchandise trade deficit at a below-trend $38.1 billion.

In the June quarter, the goods trade saw a much bigger deficit of $46.2 billion while this deficit was roughly at the same level in July-September 2018 as well.

However, despite the narrowing of the CAD in Q2FY20, the quarter saw a much lower accretion of $5.1 billion to the country’s foreign exchange reserves compared with $14 billion in Q1FY20, as the capital account surplus declined from a robust $28 billion to $12 billion. All major components of the capital account — FDI, overseas loans, portfolio inflows and ‘banking capital’ — saw a weakening in Q2 this year, against the previous quarter.

The CAD is unlikely to have enlarged much in Q3FY20 as merchandise imports continued to contract sharper than exports in October-November. Also, the financing of the deficit seems to have been helped by the strong portfolio inflows into domestic equities in October-November, although these flows have dried out in December.

In Q2FY18, the accretion to reserves were just $1.9 billion.

Releasing the Q2FY20 balance of payment data on Monday, the RBI said, “Net services receipts increased by 0.9% on a y-o-y basis, on the back of a rise in net earnings from computer, travel and financial services. Private transfer receipts, mainly representing remittances by Indians employed overseas, rose to $21.9 billion, increasing by 5.2% from their level a year ago… Foreign portfolio investment recorded a net inflow of $2.5 billion — as against an outflow of $1.6 billion in Q2 of 2018-19 — on account of net purchases in the debt market.”The CAD narrowed to 1.5% of GDP in H1FY20 from 2.6% in H1FY19 on the back of a reduction in the trade deficit which shrank to $84.3 billion in H1FY20 from $95.8 billion in H1FY19, the RBI added. Net invisible receipts were higher in H1 this year mainly due to increase in net services earnings and private transfer receipts.

Net FDI inflows at $21.2 billion in H1FY20 were higher than $ 17 billion in H1FY19. Portfolio investment recorded a net inflow of $7.3 billion in H1FY20 as against an outflow of $ 9.8 billion a year ago. In H1FY20, there was an accretion of $19.1 billion of the foreign exchange reserves, on a BoP basis.

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.

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