The Hindu Business Line : Capital account shows deficit first time in 10 years

Mumbai, March 31 India’s capital account balance turned negative, showing outflows of $3.7 billion during the October-December 2008 quarter, against net inflows of $31 billion in the corresponding quarter last year. This is the first time in 10 years, since the first quarter of 1998-99, that capital account balance has turned negative.

There were net outflows under portfolio investment, banking capital and short-term trade credit, leading to a depletion of the capital account balance. Inflows under foreign direct investment (FDI) and external commercial borrowings (ECBs) were lower compared with last year.

Similarly, the country’s current account deficit at $14.6 billion for the third quarter of 2008-09, rose sharply as against a deficit of $4.5 billion in the year ago period. This is the highest quarterly deficit since 1990. A decline in merchandise exports, marginal increase in imports and fall in invisible receipts led to the higher deficit.

According to the Balance of Payment data released by Tuesday, the gross capital inflows in Q3 2008-09 amounted to $70 billion ($127.3 billion), as against gross capital outflows of $73.6 billion ($96.3 billion).

Net FDI flow, which is net inward FDI minus net outward FDI, amounted to $820 million ($2 billion).

Portfolio investment primarily comprising FII investments and ADRs and GDRs saw net outflows to the tune of $5.8 billion, against inflows of $14.9 billion last year.

Outflows under portfolio investment were led by large sales of equities by FIIs in the Indian stock market and slowdown in net inflows under ADR/GDRs due to drying-up of liquidity in the overseas market.

FIIs investment saw an outflow of $5.8 billion, against an inflow of $9 billion last year. Investments under ADR/GDR were lower at $7 million ($5.6 billion).

Not only were net flows negative, but both inflows as well as outflows reduced sharply during the quarter, said the RBI.

Net ECBs remained lower at $3.9 billion ($6.2 billion), due to the drying up of liquidity abroad and increased cost of borrowings.

Short-term trade credit to India saw net outflow of $3.1 billion, against inflows of $4.1 billion, mainly due to lower disbursements reflecting tightness in the overseas market and increased repayments as roll over was difficult.

NRI deposits

There was a turnaround in NRI deposits, which saw an inflow of $1 billion, against an outflow of $850 million, as investors took advantage of the hike in ceiling interest rates on NRI deposits.

Banking capital, excluding NRI deposits saw a decline of $6 billion, against an inflow of $1 billion.

The foreign exchange reserves on a BoP basis (i.e. excluding valuation) declined sharply by $17.9 billion, as against an accretion of $26.7 billion.

Among the components of current account, merchandise exports fell 10.4 per cent to $36.707 billion ($41 billion).

With the exception of engineering goods, most of the commodity groups witnessed a sharp fall in exports, with rice, raw cotton, sugar and molasses, iron ore, iron and steel, gems and jewellery witnessing the maximum fall.

Imports increased marginally by 8.9 per cent to $73.014 billion, though the growth was much lower than 41.9 per cent seen in the third quarter of the previous fiscal.

Due to a sharp fall in international oil prices, oil import payments declined leading to a slower growth in imports. Other reasons include a negative growth in imports of capital goods, non ferrous metals, artificial resins, plastic materials, textile yarn and medicinal and pharmaceutical products

Trade deficit

A negative export growth led to a higher trade deficit of $36.3 billion, compared to a deficit of $26.1 billion last year.

The net invisibles increased marginally to $21.7 billion, as the decline in invisible payments was higher than the receipts.

The invisible receipts declined marginally by 0.6 per cent on account of a fall in travel, transportation and insurance receipts, private transfers and investment income.

The component of invisible payments fell 2.1 per cent due to a fall in travel, software, business services account, interest payments and dividends.

Forex reserves

During April-December 2008, the foreign exchange reserves (including the valuation effects) declined by $53.755 billion, as against an increase of $76.137 billion in the corresponding period last year.

On a BoP basis (i.e. excluding valuation effects), the foreign exchange reserves for the April-December 2008 period, declined by $20.380 billion, as against an increase of $67.174 billion last year.

Valuation loss, reflecting the depreciation of major currencies against the US dollar accounted for $33.375 billion or 62.1 per cent of the total decline in foreign exchange reserves in the April-December 2008 period, as against a valuation gain of $ 8.963 billion last year.

Apart from current account deficits, outflows under FIIs were the other major sources contributing to decline in foreign exchange reserves during April-December 2008.