India’s current account deficit (CAD) stood at $15.8 billion, or 2.4% of the gross domestic product (GDP), in the April-June period of this fiscal, nearly the same level (2.5% of GDP) as in the year-ago quarter.
India’s current account deficit (CAD) stood at $15.8 billion, or 2.4% of the gross domestic product (GDP), in the April-June period of this fiscal, nearly the same level (2.5% of GDP) as in the year-ago quarter. However, strong portfolio outflows, especially of the debt variety, and robust repayment of long-term buyer-supplier credit, resulted in depletion of the country’s forex reserves to the tune of $11.34 billion in Q1FY19, while the year-ago quarter had seen accretion of a similar amount to the reserves.
According to the balance of payments (BoP) data released by the Reserve Bank of India on Friday, net portfolio inflows turned negative (-$8.1 billion) in Q1FY19, with foreign investors pulling out $6.36 billion from the Indian debt market during the period on a net basis. Consequent to the RBI bar on banks issuing letters of undertaking (LoUs) following the Nirav Modi fraud, there was a large net outflows of $10 billion in the buyers’ credit of over 180 days.
There was little outflow on this account in the year-ago quarter. LoUs are guarantees to foreign banks/branches, based on which the firms avail loans.
The latest BoP data confirms increased vulnerability of India’s current account amid higher crude oil prices and the rupee’s fall. What adds to the woes is that the risk of capital outflows co-exist with this, in what could undermine the ability of the usually surplus capital account to finance the CAD. Moody’s had forecast that the country’s CAD would likely widen to 2.5% of GDP during 2018-19.
The surplus in capital account was just $5.2 billion in Q1FY19 as against $27 billion in Q1FY18 and $25 billion in Q4FY18.
There are however good tidings on the FDI and private transfers fronts, with net inflows of $9.7 billion and $17.2 billion respectively in Q1FY19 as against $7.1 billion and $14.6 billion in the year-ago quarter; in Q4FY18, these were $6.4 billion and $16.4 billion respectively.
Merchandise trade deficit in Q1FY19 stood at $45.7 billion as against $41.9 billion in Q1FY18 and $41.6 billion in Q4FY18. On the services front, things looked somewhat steady with net inflows on account of software services in the April-June quarter being $18.4 billion compared with $18.6 billion in the year-ago quarter and roughly same amount in Q4FY18.
The CAD for Q4FY18 was 1.9% of the GDP, much higher than a benign 0.4% in the year-ago quarter. However, since capital account saw net inflows of a robust $25 billion in the January-March 2018 quarter, higher than $22.5 billion in the previous quarter and far above $10.4 billion in the year-ago quarter. So, despite the relatively high CAD in Q4, it was financed comfortably, and there was an accretion of $13.2 billion to the foreign exchange reserves.