India’s CAD 3rd Quarter (September-December) 2017-18
For the period April-December 2017, CAD increased to 1.9 per cent of GDP from 0.7 per cent in the same period of 2016-17 on the back of a widening trade deficit.
Current account deficit (CAD) at USD 13.5 billion (2 per cent of GDP) in Q3 of 2017-18 increased from USD 8 billion (1.4 per cent of GDP) in Q3 of 2016 -17 and USD 7.2 billion (1.1 per cent of GDP) in Q2 of 2017-18.The widening of the CAD on yearly basis was primarily on account of a higher trade deficit (USD 44.1 billion) attributed to larger increase in merchandise imports relative to exports,specifically due to higher oil imports. Oil Prices have risen 25% in Q3 of 2017-18.
Net FDI flows declined against the previous year at USD 4.3 billion in the 3rd quarter of fiscal 2017-18 (against USD 9.7 billion last year and USD 12.4 billion in the 2nd quarter of fiscal 2017-18) and FII inflows were at USD 5.3 billion (against inflow of USD 11.3 billion last year and USD 2.1 billion in the 2nd quarter). On Balance of payment basis, in the 3rd quarter of 2017-18, USD 9.4 billion was added to the foreign exchange reserves as compared with USD 1.2 billion depletion in 2nd quarter of 2016-17 and USD 9.5 billion accretion in the 2nd quarter 2017-18.
Net services receipts rose by 17.8 per cent on a yearly basis on the back of rise in net earnings from software services and travel receipts.Private transfer receipts, mainly representing remittances by Indians employed overseas, at USD 17.6 billion increased by 16 per cent over last year.
During April-December 2017, on the capital account, Net NRI deposits was at USD 5 billion and ECB’s (External Commercial Borrowings) were negative USD 0.9 billion against negative USD 5.2 billion last year.
Sources of Variation in Foreign Exchange Reserves (USD billion)- Q2FY18
No. | Item | April-September 2016-17 | April-September 2017-18 |
I. | Current Account Balance | -3.90 | -22.20 |
II. | Capital Account (net) (a to f) | 19.3 | 43.2 |
a. | Foreign Investment (i+ii) | 29 | 34.1 |
- | (i) Foreign Direct Investment (FDI) | 20.90 | 19.6 |
- | (ii) Portfolio Investment | 8.20 | 14.5 |
- | Foreign Institutional Investment (FII) | 7.9 | 14.4 |
- | ADR/GDR | 0 | 0 |
b. | Banking Capital | -6.80 | 6.30 |
- | Of which: NRI Deposits | 3.5 | 1.90 |
c. | Short term credit | -0.5 | 4.60 |
d. | External Assistance | 0.60 | 0.70 |
e. | External Commercial Borrowings | -3.40 | -1.5 |
f. | Other items in capital account | 0.4 | -1 |
III. | Valuation change | -3.7 | 9.3 |
- | Total (I+II+III) @ Increase in reserves(+) / Decrease in reserves (-) | 11.8 | 30.3 |
In an increasingly globalised economy, India’s external sector plays an important role in influencing economic performance. External sector transactions, which are covered under the Balance of Payments (BoP) account, are divided into two major parts – the current account and the capital account. While the current account records transactions or transfers in goods and services, the capital account largely records transactions related to investments and borrowings.
The net inflow and outflow of foreign exchange on the BoP can impact the country’s exchange rate, inflation rate and levels of economic activity. Typically in India, we observe a ‘deficit’ on the current account that is balanced by a ‘surplus’ on the capital account, the relative trends in which impact India’s economic scenario.
When foreign exchange receipts on the current account are less than the payment obligations due on it, the current account is said to be in ‘deficit’. It does need to be noted, however, that not every component of the current account is in deficit, but the net balance is. As a result, India recorded a current account deficit of USD 32 billion in fiscal year 2013-14.
The components of the current account as per the Reserve Bank of India (RBI) are broadly divided into four parts: (i) Goods trade – which records inflow and outflow of foreign exchange resulting from export and imports of goods only. India runs a deficit on goods, recorded at USD 147.6 billion in 2013-14, of which, Petroleum, Oil and Lubricants (POL) is around 69% and non-monetary gold imports (another major import item) around 24%.
(ii) Services trade – which records inflow and outflow of foreign exchange resulting from export and imports of services only. India has a surplus on the services account, accounting for USD 73 billion in fiscal 2013-14. Over 93% of this is accounted for by the head ‘Telecommunications, computer and information services’, which includes India’s major exporting sector – Information Technology (IT) and IT enabled services.
(iii) Primary income – which covers income generated from international investments to or from India as well as compensation to employees abroad and vice-versa. Here too, India records a deficit of over USD 23 billion in 2013-14.
(iv) Secondary income – which covers gifts, remittances, aids and donations made as one way transfers from abroad to India and vice-versa across both business and government entities as well as person to person transfers. India recorded a surplus of USD 65.3 billion on this head, half of which was accounted for by workers’ remittances from abroad.
There is a midway split among these components of the current account with a deficit on two items and a surplus on the remaining two. However, the surplus is not large enough to cover for the deficit items, leading to an overall current account deficit.
How is the current account deficit funded?
At an economy wide level, the current account deficit is funded through the surplus on the capital account, which could be in the form of surplus on foreign investments (direct and portfolio), external borrowings by companies or government debt and transfers and/or a drawing down of the foreign exchange reserves of the country.
The import cover, which is the ratio of foreign exchange reserves to imports should be for at least 3-4 months for any economy, so that the country does not default on its international payments. Typically India has maintained a higher than minimum import cover, except in crisis situations like 1990-91, when the it fell to 3 weeks of imports in December 1990.
How does a high current account deficit impact the economy?
If a current account deficit becomes unsustainable i.e. so high that it cannot be met through the surplus on the capital account or significant drawing down of the foreign exchange reserves, the currency can depreciate sharply, which in turn can lead to imported inflation, loss of investor confidence and a consequent slowing down in demand and economic growth. The extent to which these trends play out is of course dependent on a host of factors like the relative value of the deficit, trends in capital flows, the stage of the business cycle among others.
India’s CAD Previous quarters
India’s CAD 2nd Quarter (June -September) 2017-18
In the first half of 2017-18, foreign exchange reserves rose by USD 20.9 billion on strong capital flows despite rise in current account deficit.
Current account deficit (CAD) at USD 7.2 billion (1.2 per cent of GDP) in Q2 of 2017-18 increased sharply from USD 3.4 billion (0.6 per cent of GDP) in Q2 of 2016 -17 but fell sharply from USD 15.0 billion (2.5 per cent of GDP) in Q1 of 2017-18.The widening of the CAD on yearly basis was primarily on account of a higher trade deficit (USD 32.8 billion) attributed to larger increase in merchandise imports relative to exports,specifically due to higher oil imports.
FDI flows were USD 12.4 billion in the 2nd quarter of fiscal 2017-18 (against USD 17.2 billion last year and USD 7.2 billion in the 1st quarter of fiscal 2017-18) and FII flows were USD 2.1 billion (against USD 6.1 billion last year and USD 11.9 billion in the 1st quarter). On Balance of payment basis, in the 2nd quarter 2017-18, USD 9.5 billion was added to the foreign exchange reserves as compared with USD 8.5 billion in 2nd quarter of 2016-17 and USD 11.4 billion in the 1st quarter 2017-18.
Net services receipts rose by 13.1 per cent on a yearly on the back of rise in net earnings from software services and travel receipts.Private transfer receipts, mainly representing remittances by Indians employed overseas, at USD 17.4 billion increased by 14.7 per cent over the last year.
India’s CAD 1st Quarter (April-June) 2017-18
India reported its highest fx reserves at USD 400.7 billion as of 8th September 2017 despite current account deficit jumping to 2.4% of GDP in the 1st qtr of this fiscal year on account of strong capital flows.
Current account deficit (CAD) at USD 14.3 billion (2.4 per cent of GDP) in Q1 of 2017-18 increased sharply from USD 0.4 billion (0.1 per cent of GDP) in Q1 of 2016 -17 and USD 3.4 billion (0.6 per cent of GDP) in Q4 of 2016-17.The widening of the CAD on yearly basis was primarily on account of a higher trade deficit (USD 41.2 billion) attributed to larger increase in merchandise imports relative to exports.
FDI flows of USD 7.2 billion in the 1st quarter of fiscal 2017-18 (against USD 3.9 billion last year and USD 5 billion in the 4th quarter) and FII flows of USD 11.9 billion (against USD 1.2 billion last year and USD 10.8 billion in the 4th quarter) increased India’s BOP (Balance of Payment) by USD 16.6 billion including valuation effect (against increase of USD 3.3 billion last year and USD 7.3 billion in the 4th quarter). Excluding valuation effect, foreign exchange reserves increased by USD 11.4 billion in the 1st quarter of fiscal 2017-18 (against USD 7.0 billion last year)
Net services receipts rose by 15.7 per cent on a yearly as rise in net earnings from travel, construction and other business services.Private transfer receipts, mainly representing remittances by Indians employed overseas, at USD 16.1 billion increased by 5.3 per cent over the corresponding quarter of previous year.Private transfers could see more moderation given that a large number of Indians are employed in oil producing countries that are feeling the effects of low oil prices on their economies and also due to the slowdown seen in software services industry.
Major Items of India's Balance of Payments (USD Billion) - Q1 FY18
Period | April-June 2017 | - | - | April-June 2016 | - | - |
Detail | Credit | Debit | Net | Credit | Debit | Net |
A. Current Account | 140.5 | 154.8 | -14.3 | 125 | 125.4 | -0.4 |
1. Goods | 73.7 | 114.9 | -41.2 | 66.6 | 90.5 | -23.8 |
Petroleum Products | 8.2 | 23.2 | -15.1 | 6.8 | 19 | -12.2 |
2. Services | 45.9 | 27.7 | 18.2 | 39.4 | 23.6 | 15.7 |
3. Primary Income | 4.8 | 10.6 | -5.8 | 3.7 | 10 | -6.3 |
4. Secondary Income | 16.1 | 1.7 | 14.5 | 15.3 | 1.3 | 14 |
B. Capital Account and Financial Account | 155.2 | 141.3 | 14 | 129.2 | 129 | 0.2 |
Change in Reserve (Increase (-)/Decrease (+)) | 0 | 11.4 | -11.4 | 0 | 7 | -7 |
C. Errors & Omissions (-) (A+B) | 0.4 | - | 0.4 | 0.2 | - | 0.2 |
Sources of Variation in Foreign Exchange Reserves (USD billion)- Q1FY18
Category | 2016-17 April-June | 2017-18 April-June |
Current Account Balance | -0.4 | -14.3 |
Capital Account (net) ( | 7.4 | 25.70 |
Foreign Investment of which | 6 | 19.70 |
of which: Foreign Direct Investment | 3.90 | 7.2 |
Portfolio Investment | 2.1 | 12.5 |
FII | 1.20 | 11.9 |
ADR/GDR | 0 | 0 |
Banking Capital | -0.1 | 6.2 |
Of which: NRI Deposits | 1.40 | 1.20 |
Short term credit | -0.30 | 0.60 |
External Assistance | 0.70 | 0.60 |
External Commercial Borrowings | -2 | -0.30 |
Other items in capital account | 3.1 | -1.1 |
Valuation change | -3.6 | 5.2 |
Total (I+II+III) @ Increase in reserves(+) / Decrease in reserves (-) | 3.30 | 16.6 |
India’s CAD 4th Quarter (January – March 2017) and Full Year (April – March) 2016-17
FDI flows of USD 5 billion in the 4th quarter and USD 35.6 billion in the April-March 2016-17 period coupled with fall in trade deficit by 14% helped India’s BOP (Balance of Payment) stay positive. Current Account Deficit (CAD) printed at 0.6% of GDP for the 4th quarter and 0.7% of GDP for fiscal 2016-17 lower than 1.4% of GDP seen in the 3rd quarter and 0.7% of GDP seen in the last fiscal year. CAD was USD 3.2 billion in the 4th quarter and USD 15.2 billion in fiscal 2015-16 against USD 0.7 billion and USD 22.1 billion respectively seen in the last fiscal year.
BOP was positive USD 7.3 billion and USD 21.6 billion for the 4th quarter and fiscal 2016-17 respectively against USD 3.3 billion and USD 17.9 billion seen in the previous fiscal year after adjusting for valuation effects of USD 11.8 billion and USD 0.6 billion respectively.
On the current account, trade deficit was down to USD 112.4 billion in the April-March 2017 period from USD 130.1 billion seen in the last fiscal year. Net invisible receipts were lower, mainly due to moderation in both software exports and net private transfer receipts, and higher outflow on account of primary income.Private transfers could see more moderation given that a large number of Indians are employed in oil producing countries that are feeling the effects of low oil prices on their economies.
On the capital account, portfolios flows were USD 7.6 billion against negative USD 4.1 billion. NRI deposits were lower by USD 12.4 billion from last year, largely due to FCNR B deposit maturity of around USD 20 billion in the September-November 2016 period. ECB’s (External Commercial Borrowings) were negative USD 6.1 billion against negative USD 4.5 billion last year. The INR is up by 7.07% against the USD since November 2016 when it was trading slightly above its all-time low level of Rs 68.8 (seen in August 2013) against the USD driven by positive BOP.
Major Items of India's Balance of Payments (USD Billion) - Q4 FY17
Period | January-March 2017 | - | - | January-March 2016 | - | - | 2016-17 | X.1 | X.2 | 2015-16 | X.3 | X.4 |
Detail | Credit | Debit | Net | Credit | Debit | Net | Credit | Debit | Net | Credit | Debit | Net |
A. Current Account | 138.3 | 141.7 | -3.4 | 124.7 | 125 | -0.3 | 521.1 | 536.3 | -15.2 | 501.4 | 523.5 | -22.1 |
1. Goods | 77.4 | 107.1 | -29.7 | 65.8 | 90.6 | -24.8 | 280.1 | 392.6 | -112.4 | 266.4 | 396.4 | -130.1 |
Petroleum Products | 9 | 25.6 | -16.6 | 6.2 | 14.7 | -8.5 | 31.5 | 86.8 | -55.3 | 30.6 | 82.9 | -52.4 |
2. Services | 40.7 | 23.1 | 17.6 | 39.4 | 23.3 | 16.1 | 163.1 | 95.7 | 67.5 | 154.3 | 84.6 | 69.7 |
3. Primary Income | 4.5 | 10 | -5.6 | 3.7 | 10.3 | -6.6 | 16.3 | 42.6 | -26.3 | 14.7 | 39.1 | -24.4 |
4. Secondary Income | 15.7 | 1.5 | 14.2 | 15.7 | 0.7 | 15 | 61.5 | 5.5 | 56 | 66 | 3.3 | 62.7 |
B. Capital Account and Financial Account | 145.1 | 142.1 | 3.1 | 127.3 | 127.2 | 0.2 | 551.9 | 537.1 | 14.9 | 510.9 | 487.8 | 23.2 |
Change in Reserve (Increase (-)/Decrease (+)) | 0 | 7.3 | -7.3 | 0 | 3.3 | -3.3 | 1.2 | 22.8 | -21.6 | 0.9 | 18.8 | -17.9 |
C. Errors & Omissions (-) (A+B) | 0.4 |
| 0.4 | 0.2 |
| 0.2 | 0.4 |
| 0.4 |
Sources of Variation in Foreign Exchange Reserves (USD billion)- FY17
Category | April-March 2015-16 | April-March 2016-17 |
Current Account Balance | -22.20 | -15.3 |
Capital Account (net) ( | 40.1 | 36.80 |
Foreign Investment of which | 31.90 | 43.2 |
of which: Foreign Direct Investment | 36 | 35.6 |
Portfolio Investment | -4.10 | 7.60 |
FII | -4 | 7.80 |
ADR/GDR | 0.4 | 0 |
Banking Capital | 10.60 | -16.6 |
Of which: NRI Deposits | 16.1 | -12.4 |
Short term credit | -1.6 | 6.5 |
External Assistance | 1.5 | 2 |
External Commercial Borrowings | -4.5 | -6.10 |
Other items in capital account | 2.2 | 7.9 |
Valuation change | 0.60 | -11.8 |
Total (I+II+III) @ Increase in reserves(+) / Decrease in reserves (-) | 18.5 | 9.8 |
India’s CAD 3rd Quarter (October-December) 2016-17
CAD (Current Account Deficit) rose to USD 7.9 billion(1.4% of GDP) in the 3rd quarter of fiscal 2016-17 from levels of USD 3.4 (0.6% of GDP) billion in the 2nd quarter of fiscal 2016-17 and against USD 7.1 billion (1.4%) in the 3rd quarter of last year.
Trade deficit was at USD 33.52 billion in the 3rd quarter of fiscal 2016-17 from levels of USD 31.52 billion last year and USD 23.79 billion in the preceding quarter.
FDI flows were USD 9.578 billion in the 3rd quarter against USD 17.195 billion in the 2nd quarter of fiscal 2016-17 (against USD 10.702 billion last year) while FII flows were USD -10.38 billion against USD -0.21 billion last year). India’s BOP (Balance of Payment) decreased by USD 0.5 billion including valuation effect in the 3rd quarter against USD 8.5 billion including valuation effect in the 2nd quarter. Excluding valuation effect, foreign exchange reserves decreased by USD 1.3 billion during April-December 2016.
On the current account apart from trade deficit Net invisible receipts declined from last year on moderation in net service receipts and private transfer receipts while primary income saw marginally higher net outflows. Private transfers could see more moderation given that a large number of Indians are employed in oil producing countries that are feeling the effects of low oil prices on their economies and also due to the slowdown seen in software services industry.
On the capital account, NRI deposits was lower than last year while ECB’s (External Commercial Borrowings) were negative against positive flows seen last year.
Major Items of India's Balance of Payments (USD Billion) - Q3 FY17
Period | October- December 2016 | - | -1 | October- December 2015 | -2 | -3 |
Detail | Credit | Debit | Net | Credit | Debit | Net |
A. Current Account | 130.1 | 138 | -7.9 | 122.6 | 129.7 | -7.1 |
1. Goods | 68.8 | 102 | -33.3 | 64.9 | 98.9 | -34 |
Petroleum Products | 8.2 | 21.7 | -13.5 | 7.4 | 20 | -12.6 |
2. Services | 42.1 | 24.5 | 17.6 | 37.9 | 19.9 | 18 |
3. Primary Income | 4 | 10.1 | -6.2 | 3.8 | 10.2 | -6.4 |
4. Secondary Income | 15.3 | 1.4 | 13.9 | 15.9 | 0.7 | 15.3 |
B. Capital Account and Financial Account | 138.7 | 131.3 | 7.4 | 115.1 | 108.3 | 6.8 |
Change in Reserve (Increase (-)/Decrease (+)) | 1.2 | - | 1.2 | - | 4.1 | -4.1 |
C. Errors & Omissions (-) (A+B) | 0.5 | - | 0.5 | 0.3 | - | 0.3 |
India’s CAD 2nd Quarter (July-September) 2016-17
CAD is likely to stay low given fall in oil prices and that would keep the INR stay relatively strong against the USD despite rate hikes by the Fed. INR has been one of the best performing currencies over the last one year despite falling against the USD.
INR has been a relative outperformer against the USD with respect to other global currencies. Table 2. INR is likely to stay stable given positive BOP position and would continue to outperform its peers in 2016.
Balance of Payments rose in the 2nd quarter of fiscal 2016-17 driven by rise in FDI and FII flows. Positive foreign flows indicate confidence among overseas investors in the Indian economy.
CAD (Current Account Deficit) rose to USD 3.4 billion (0.6% of GDP) in the 2nd quarter of fiscal 2016-17 from levels of USD 0.3 billion (0.1% of GDP) in the 1st quarter of fiscal 2016-17 and against USD 8.5 billion (1.7% of GDP) in the 2nd quarter of last year. The quarter on quarter rise in CAD is positive as it shows that the economy is seeing more activity. India’s being a growth economy should have CAD of over 2% of GDP.
Trade deficit was at USD 25.6 billion in the 2nd quarter of fiscal 2016-17 from levels of USD 37.2 billion last year and USD 19.24 billion in the preceding quarter.
FDI flows were USD 17.2 billion in the 2nd quarter against USD 4.1 billion in the 1st quarter of fiscal 2016-17 (against USD 6.5 billion last year) while FII flows were USD 7 billion against USD 1.2 billion (against USD 3.3 billion last year). India’s BOP (Balance of Payment) increased by USD 8.5 billion including valuation effect in the 2nd quarter against USD 3.3 billion including valuation effect in the 1st quarter (against decline of USD 0.9 billion last year). Excluding valuation effect, foreign exchange reserves increased by USD 4.8 billion in the 2nd quarter of fiscal 2016-17.
The INR is set to gain from improved CAD on the back of strong portfolios flows seen in the second quarter of fiscal 2016-17. FII flows are USD 5,3 billion in the July – September 2016 period and that will lead to an increase in BOP.
CAD (Current Account Deficit) fell to USD 0.3 billion (0.1% of GDP) in the 1st quarter of fiscal 2016-17 against USD 6.1 billion (1.2% of GDP) in the 1st quarter of last year and USD 0.3 billion (0.1% of GDP) for the 4th quarter of last fiscal year. Trade deficit that fell to USD 23.8 billion in the 1st quarter of fiscal 2016-17 from levels of USD 34.2 billion last year and USD 24.8 billion in the preceding quarter helped lower the CAD. Trade deficit fell on the back of fall in imports by 11.5% against 2.4% fall in exports. Oil and gold imports that were down by 24% and 60% helped lower imports.
FDI flows of USD 4.1 billion in the 1st quarter of fiscal 2016-17 (against USD 10.billion last year and USD 8.8 billion in the 4th quarter) and FII flows of USD 1.2 billion (against USD -0.2 billion last year and USD 1.5 billion in the 4th quarter) increased India’s BOP (Balance of Payment) by USD 3.3 billion including valuation effect (against increase of USD 14.4 billion last year and USD 3.3 billion in the 4th quarter). Excluding valuation effect, foreign exchange reserves increased by USD 7 billion in the 1st quarter of fiscal 2016-17 (against USD 11.4 billion last year and USD 3,3 billion in the 4th quarter).
On the current account apart from trade deficit Net invisible receipts declined from last year on moderation in net service receipts and private transfer receipts while primary income saw marginally higher net outflows. Private transfers could see more moderation given that a large number of Indians are employed in oil producing countries that are feeling the effects of low oil prices on their economies.
On the capital account, NRI deposits was lower than last year while ECB’s (External Commercial Borrowings) were negative against positive flows seen last year.
India’s CAD 4th Quarter (January – March) and Full Year (April – March) 2015-16
FDI flows of USD 8.8 billion in the 4th quarter and USD 36 billion in the April-March 2015-16 period coupled with fall in trade deficit by 21.5% and 14% respectively helped India’s BOP (Balance of Payment) stay positive. Current Account Deficit (CAD) printed at 0.1% of GDP for the 4th quarter and 1.1% of GDP for fiscal 2015-16 lower than 1.3% of GDP seen in the 3rd quarter and 1.3% of GDP seen in the last fiscal year. CAD was USD 0.3 billion in the 4th quarter and USD 22.1 billion in fiscal 2015-16 against USD 0.7 billion and USD 26.8 billion respectively seen in the last fiscal year.
BOP was positive USD 3.3 billion and USD 17.9 billion for the 4th quarter and fiscal 2015-16 respectively against USD 30.1 billion and USD 61.4 billion seen in the previous fiscal year after adjusting for valuation effects of USD 0.6 billion and USD – 24 billion respectively.
On the current account, trade deficit was down to USD 118.5 billion in the April-March 2016 period from USD 138 billion seen in the last fiscal year. Net invisible receipts declined from last year on moderation in net service receipts and private transfer receipts while primary income saw marginally higher net outflows. Private transfers could see more moderation given that a large number of Indians are employed in oil producing countries that are feeling the effects of low oil prices on their economies.
On the capital account, portfolios flows were negative USD 4.1 billion against USD 42.2 billion. NRI deposits was higher than last year while ECB’s (External Commercial Borrowings) were negative against positive flows seen last year. The INR has managed to stay afloat against the USD despite weak capital flows this year due to fall in CAD. The INR is down 5% over the last one year.
India’s CAD 3rd Quarter (October – December) and 9 Months (April – December) 2015-16
FDI flows of USD 10.8 billion in the 3rd quarter and USD 27.4 billion in the April-December 2015 period coupled with fall in oil imports by 12.7% and 68% respectively helped India’s BOP (Balance of Payment) stay positive. Current Account Deficit (CAD) printed at 1.3% of GDP for the 3rd quarter and 1.4% of GDP for the nine months of fiscal 2015-16 lower than 1.5% of GDP and 1.7% of GDP respectively seen in the last fiscal year. CAD was USD 7.1 billion in the 3rd quarter and USD 28.1 billion in the nine months of fiscal 2015-16 against USD 7.7 billion and USD 26.9 billion respectively seen in the last fiscal year.
BOP was positive USD 4.1 billion and USD 14.6 billion for the 3rd quarter and nine months of fiscal 2015-16 respectively against USD 13.2 billion and USD 31.3 billion seen in the previous fiscal year after adjusting for valuation effects of USD – 5.9 billion and USD – 14.8 billion respectively.
On the current account, trade deficit was down to USD 105.6 billion in the April-December 2015 period from USD 113.4 billion seen in the last fiscal year. Net invisible receipts declined from last year on moderation in net service receipts and private transfer receipts while primary income saw lower net outflows. Private transfers could see more moderation given that a large number of Indians are employed in oil producing countries that are feeling the effects of low oil prices on their economies.
On the capital account, portfolios flows was negative USD 3.4 billion against USD 28.5 billion. NRI deposits was higher than last year while ECB’s (External Commercial Borrowings) were negative against positive flows seen last year. The INR was down in December 2015 against levels seen in September 2015 and December 2014 on the back of portfolio outflows.
India’s CAD 2nd Quarter (June – September) and 1st Half Fiscal (April – September) 2015-16
Portfolio flows were negative by USD 6.5 billion in the 2nd quarter of fiscal 2015-16 taking cumulative portfolio flows to negative USD 8.7 billion in the first half of the fiscal. As against negative flows this fiscal, portfolio flows were positive USD 22.2 billion in the 1st half of the last fiscal year. Fed rate hike expectations during the year and the hike in rates in December has cast a shadow on attraction of Indian assets to foreign portfolio investors.
The union budget for 2016-17 to be tabled in the Parliament in February 2016 will be crucial for determining direction of portfolio flows. The Fed has guided for rate hikes in 2016 and any disappointment on the Union Budget will impact portflows flows negatively, which in turn will affect the CAD negatively leading to pressure on the INR.
India’s Current Account Deficit (CAD) was at 1.6% of GDP in the 2nd quarter of fiscal 2015-16 against 1.2% of GDP seen in 1st quarter and 2.2% of GDP seen last year 2nd quarter. CAD was at USD 8.2 billion against USD 6.2 billion and USD 10.9 billion in the 1st quarter and 2nd quarter of last year respectively. CAD was at 1.4% of GDP in the 1st half of this fiscal year against 1.8% of GDP seen in the 1st half of last fiscal year. CAD was at USD 14.4 billion against USD 18.4 billion.
CAD contracted largely due to fall in trade deficit. Trade deficit for 2nd quarter of 2015-16 was USD 37.4 billion against USD 39.4 billion seen in 2nd quarter of last fiscal. Trade deficit was USD 71.6 billion against USD 74.7 billion in the 1st half of the fiscal.
Balance of Payment was negative USD 0.9 billion for the 2nd quarter of this fiscal year and was positive USD 8.7 billion for the 1st half. FDI helped negate reversal of portfolio flows with inflows of USD 16.7 billion in the 1st half of the fiscal. NRI deposits rose 35.56% from USD 6.5 billion to USD 10.1 billion in the 1st half. NRI deposits rose 4% in the 2nd quarter. ECB flows were negative USD 0.9 billion in the 1st half against positive flows of USD 0.8 billion seen last year. Net receipts from services and private transfers fell marginally in the 1st half.
India’s CAD 1st Quarter Fiscal (April-June) 2015-16
India’s Current Account Deficit (CAD) fell 1.2% in the first quarter of fiscal 2015-16 to USD 6.2 billion as against USD 7.2 billion seen in the first quarter of fiscal 2014-15. Fall in trade deficit by 2.6% helped CAD come off. Capital flows of USD 17.6 billion (USD 19 billion 1st quarter last fiscal) helped increase foreign exchange reserves by USD 11.4 billion. Table 1 and Table 2. Capital flows were led by FDI at USD 10.2 billion while FII flows were negative USD 2.7 billion. NRI deposits more than doubled to USD 5.9 billion. Higher inflow through services and lower outflow on account of primary income (profit, dividend and interest) helped lower CAD. There was a marginal decline in private transfers from abroad at USD 16.2 billion.
The fall in CAD will help the INR in times of global risk aversion caused by Fed rate hikes or China Yuan devaluation.
India’s CAD Fiscal 2014-15
Capital flows of USD 89.3 billion in fiscal 2014-15 was higher than CAD of USD 27.9 billion resulting in accretion of USD 61.4 billion to India’s foreign exchange (fx) reserves. RBI data indicates that it has bought USD 57 billion in the April 2014 – March 2015 period, leading to liquidity infusion of Rs 3400 billion into the system.
The INR has held its feet against a rising USD with a drop of around 7% over the last one year. The USD index has gained by over 20% over the last one year. INR has dropped largely on worries of global risk aversion on the back of high volatility in global bond yields. Read our note on “Global Bond Bubbles” for understanding global bond volatility. The strong BOP (Balance of Payment) numbers is positive for the INR and unless there is large scale capital outflows, INR is unlikely to see sharp depreciation.
India’s Current Account Deficit (CAD) fell 15% year on year in fiscal 2014-15. The fall in CAD was led by drop in trade deficit that fell 2.3% on account of lower oil imports that fell 16% on the back of lower crude oil prices that are down 50% since April 2014. Rise of 3.7% in net service receipts helped lower the CAD.
The other components of CAD that are services, primary and secondary income showed marginally positive to negative trends with services registering an increase, primary income showing a larger deficit and secondary income increasing in 2014-15.Table 1.
Portfolio flows were robust with FII and FDI (Foreign Direct Investments) flows at USD 40.9 billion and USD 32.6 billion respectively. FII flows were negative USD 5 billion in fiscal 2013-14 while FDI flows were at USD 21.6 billion.Table 2.
India’s CAD Fiscal 2013-14
India’s Current Account Deficit (CAD) fell to USD 32 billion in fiscal year 2013-14 from USD 87 billion seen in fiscal year 2012-13, a drop of 63%. CAD was at 1.7% of GDP in fiscal 2013-14 against 4.7% of GDP in fiscal 2012-13. The sharp drop in CAD is attributable to the fall in trade deficit that fell by 24.6% in fiscal 2013-14. The fall in trade deficit was largely due to curbs on gold imports that fell 40%. Can this low CAD sustain?
CAD of 1.7% of GDP is the lowest since 2007-08 when India recorded a CAD of 1.3% of GDP. CAD of 4.8% of GDP seen in 2012-13 was the highest on record. The INR has depreciated by 50% against the USD from levels of around Rs 40 seen in 2007-08 to levels of Rs 60 seen in 2013-14. The lower value of INR should ideally make exports of goods and services more competitive. However given domestic inflation with CPI (Consumer Price Index) running at 9.5% over the last five years, there was a rush to gold as a hedge and that took up the CAD. Global gold prices have risen by 62% since 2007-08 and that made imports costlier with value of gold imports up by 9x since 2007-08.
Going forward, if inflation is kept down and demand for gold comes off and exports get a boost on INR value plus growth in global economies, the CAD can be kept at around 2% to 2.5% of GDP, which is the target of policy makers.
Major Items of India's Balance of Payments (USD Billion) -Q1FY17
Period | Apr-Jun 2016 | - | - | Apr-Jun 2015 | - | - |
Detail | Credit | Debit | Net | Credit | Debit | Net |
A. Current Account | 125.2 | 125.5 | -0.3 | 126.9 | 133 | -6.1 |
1. Goods | 66.6 | 90.5 | -23.8 | 68 | 102.2 | -34.2 |
Petroleum Products | 7 | 19 | -12 | 8.3 | 24.7 | -16.4 |
2. Services | 39.5 | 23.8 | 15.8 | 38.3 | 20.5 | 17.8 |
3. Primary Income | 3.8 | 10 | -6.2 | 3.3 | 9.2 | -5.9 |
4. Secondary Income | 15.3 | 1.3 | 14 | 17.3 | 1.1 | 16.2 |
B. Capital Account and Financial Account | 129.2 | 129 | 0.1 | 141.1 | 133.9 | 7.2 |
Change in Reserve (Increase (-)/Decrease (+)) | 0 | 7 | -7 | 0 | 11.4 | -11.4 |
C. Errors & Omissions (-) (A+B) | 0.2 | 0 | 0.2 | 0 | 1.1 | -1.1 |
Sources of Variation in Foreign Exchange Reserves (USD billion) - Q1FY17
Category | April-June 2015-16 | April-June 2016-17 |
Current Account Balance | -6.10 | -0.30 |
Capital Account (net) (a to f) | 17.6 | 7.30 |
Foreign Investment of which | 10.20 | 6.2 |
of which: Foreign Direct Investment | 10 | 4.10 |
Portfolio Investment | 0.2 | 2.1 |
FII | -0.2 | 1.20 |
ADR/GDR | 0.30 | 0 |
Banking Capital | 11 | -0.1 |
Of which: NRI Deposits | 5.9 | 1.40 |
Short term credit | -2.40 | -0.30 |
External Assistance | 0.30 | 0.70 |
External Commercial Borrowings | 0.4 | -2.1 |
Other items in capital account | -2 | 3 |
Valuation change | 2.90 | -3.6 |
Total (I+II+III) @ Increase in reserves(+) / Decrease in reserves (-) | 14.4 | 3.30 |
