External cheer: Current account deficit dips sharply

A pick up in merchandise exports and moderation in imports, particularly gold imports, saw India’s current account deficit (CAD) narrow sharply to $4.2 billion (0.9 per cent of GDP) in the October-December period of 2013-14.

CAD in the corresponding year ago period and the preceding quarter (July-September 2013) were at $31.9 billion (6.5 per cent of GDP) and $5.2 billion (1.2 per cent of GDP), respectively.

CAD, which is a key indicator of a country’s external vulnerability, arises when a country’s total imports of goods, services and transfers are greater than exports.

In the first nine months of the current fiscal, contraction in the trade deficit (difference between imports and exports), coupled with a rise in net invisibles receipts (relating to services, transfers and income), resulted in a reduction of the CAD to $31.1 billion (2.3 per cent of GDP) from $69.8 billion (5.2 per cent of GDP) in the year ago period.

In the reporting quarter, merchandise exports increased by 7.5 per cent to $79.8 billion (3.9 per cent in Q3 of 2012-13).

This increase in merchandise exports came on the back of significant growth especially in the exports of engineering goods, readymade garments, iron ore, marine products and chemicals, according to RBI’s statement on ‘Developments in India’s Balance of Payments (BoP) during the Third Quarter (October-December) of 2013-14’.

On the other hand, merchandise imports at $112.9 billion, recorded a decline of 14.8 per cent in the reporting quarter as against an increase of 10.4 per cent in the year ago period.

Decline in imports in the October-December period was primarily led by a steep decline in gold imports, which amounted to $3.1 billion as compared to $17.8 billion in the year ago period and $3.9 billion in the July-September 2013 period.

Barclays Research, in a report said, “The large decline in gold imports continued in Q4 13 and the softer non-oil, non-gold demand helped contain the merchandise trade balance. In FY 13-14 we estimate the trade deficit will improve by more than $30 billion from about $196 billion in FY 12-13.”

On balance, given the lower vulnerabilities, Barclays said it continues to expect the rupee to maintain a stable-to-positive bias in the near term. It has forecast rupee at 61 to the dollar over the next 3-6 months.

According to the RBI, in the October-December 2013 period, on net basis, foreign direct investment was higher at $6.1 billion ($2.5 billion in the year ago period) while portfolio investment was lower at $2.4 billion ($8.6 billion).

Within portfolio investment, the debt segment showed net outflow in Q3 which, however, was offset by higher net inflows of $6.2 billion under the equity category.

A break-up of the BoP data shows that net inflows of Non-Resident India (NRI) deposits amounted to $21.4 billion in the reporting quarter as compared with $2.7 billion in the year-ago period.

A sharp increase in NRI deposits was on account of fresh Foreign Currency Non-Resident deposits mobilised under the swap scheme offered by the RBI during September-November 2013.

Loans (net) availed by other sectors (i.e. external commercial borrowings) at $4.1 billion also showed an increase of 42.1 per cent over Q3 of 2012-13.

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