Money & Banking

CAD widens to $8.1 billion in Q4FY21 over higher trade deficit, lower net invisible receipts

Our Bureau Mumbai | Updated on June 30, 2021

As a percentage of GDP, the current account deficit in the fourth quarter stood at 1 per cent

India’s current account deficit widened to $8.1 billion in Q4FY21 from $2.2 billion in the preceding quarter, primarily on account of a higher trade deficit and lower net invisible receipts.

The country’s current account balance recorded a surplus of $0.6 billion in the year ago quarter.

Current account deficit arises when the value of imports is greater than the value of exports. Current account surplus arises when the value of imports is less than the value of exports.

As a percentage of GDP, the current account deficit in Q4FY21 was at 1 per cent against a surplus of 0.1 per cent in the year-ago period and a deficit of 0.3 per cent in the preceding quarter.

Current account surplus in FY21

The current account balance recorded a surplus of 0.9 per cent of GDP in 2020-21 (or $24 billion) as against a deficit of 0.9 per cent in 2019-20 (or -$24.6 billion).

This came on the back of a sharp contraction in the trade deficit to $102.2 billion from $157.5 billion in 2019-20, the RBI said.

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In FY21, net foreign direct investment (FDI) inflows were at $44 billion ($43 billion in FY20); net foreign portfolio investments (FPI) increased by $36.1 billion ($1.4 billion); and external commercial borrowings to India recorded an inflow of $0.2 billion ($21.7 billion), RBI said in its “Developments in India’s Balance of Payments during the Fourth Quarter (January-March) of 2020-21” report.

Aditi Nayar, Chief Economist at ICRA, said: “A normalisation in import demand as well as a surge in gold imports contributed to the widening of the current account deficit…, in spite of the massive increase in exports in March 2021.”

“The size of the current account deficit in Q4FY21 exceeded our forecasts, led by a lower than anticipated surplus of secondary income and services trade, whereas the outflow of primary income was also modestly higher than projected.”

Nayar observed that with the widening State level restrictions shrinking the domestic demand for fuels and gold in May 2021, the current account is expected to revert to a small, transient surplus in the ongoing quarter.

Rahul Bajoria, Chief India Economist at Barclays Securities (India) assessed that with activity continuing to normalise and with higher commodity prices, the current account deficit is likely to widen in the coming quarters.

In the current fiscal year, Bajoria expects India to post a current account deficit of $35 billion (1.1 per cent of GDP), although robust capital flows will ensure a Balance of Payments surplus of $50 billion.

“Despite the rising vaccine costs, we expect the central bank to continue its strategy of accumulating foreign exchange (FX) reserves. We expect the RBI’s FX reserves to increase to $645 billion by March 2022,” he said.

Published on June 30, 2021

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