Q1 result: Current account in rare, large surplus

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October 1, 2020 5:48 AM

Analysts had attributed the big surplus in “other capital” category in December quarter, to portfolio investors’ outstanding balances with banks and pending issuance of shares to FDI investors.

Exports during April-September this fiscal dipped by 21.43 per cent to USD 125.06 billion. Imports during the period stood at USD 148.69 billion, recording a negative growth of 40.06 per cent.Exports during April-September this fiscal dipped by 21.43 per cent to USD 125.06 billion. Imports during the period stood at USD 148.69 billion, recording a negative growth of 40.06 per cent.

In a rarity, India produced a current account surplus for the second straight quarter in Q1FY21, and that too, a rather big and unprecedented one of $19.8 billion or 3.9% of the gross domestic product (GDP).

The current account was in a small surplus of $0.6 billion or 0.1% of GDP in the previous quarter (Q4FY20).

The surpluses have been enabled by a narrowing of the country’s usually very large merchandise trade deficit, owing to steeper decline in imports relative to exports.

Though the current account surplus brings a semblance of improvement in India’s balance of payments, this has obviously not resulted from any wholesome, structural change but only reflects the current economic turmoil.

Pertinently, the capital account, which is usually in considerable surplus, was almost flat in Q1FY21 ($0.55 billion), compared with a surplus of $17.35 billion in the previous quarter and even more robust net inflows of $28.6 billion in the year-ago quarter. Net accretion to foreign exchange reserves were $19.85 billion in June quarter, compared with $18.8 billion in the previous quarter and about $14 billion in the year-ago quarter.

Disruption of economic activities due to the lockdown led to a sharp fall in imports in the June quarter and, as a result, the merchandise trade deficit declined to just $10 billion in the period, compared with $35 billion in Q4FY20. The deficit in goods trade was $46.8 billion in Q1FY20, in what represented its sticky level under normal circumstances in recent years.

The current account may show a surplus in September quarter (Q2FY21) too, though it could be much lower than in the June quarter, which saw lock-down impact the most. Goods trade balance shifted from the first-ever monthly surplus ($0.8 billion) in about 18 years in June, to a deficit of $4.83 billion in July and $6.77 billion in August. Still, at $11.6 billion, goods trade deficit in July-August was sharply lower than that of $27.3 billion a year earlier, as imports continued to contract at a faster pace than exports.

A sharp decline FDI (net outflow of $0.4 billion) and portfolio capital (net inflow of $0.64 billion) and also a precipitous fall in “other capital” (net outflow of $4.4 billion compared with $13.8 billion net inflows in the December quarter) reduced the capital account surplus in June quarter. Analysts had attributed the big surplus in “other capital” category in December quarter, to portfolio investors’ outstanding balances with banks and pending issuance of shares to FDI investors.

As for the September quarter, while any current account surplus, if at all, could be less than in June quarter, the capital account might prove to be relatively stronger. Net portfolio inflows till September 29 in Q2 were about $6.3 billion, as inflows into equity were rather strong in July-August, particularly in the later month.

Explaining the key features of balance of payments in Q1FY21, RBI said in a statement: “Net services receipts remained stable, primarily on the back of net earnings from computer services. Private transfer receipts, mainly representing remittances by Indians employed overseas, amounted to $18.2 billion, a decline of 8.7% from their level a year ago. Net outgo from the primary income account, primarily reflecting net overseas investment income payments, increased to $7.7 billion from $6.3 billion a year ago.”

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