CLSA:: INDIA BALANCE OF PAYMENTS – Remains manageable

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1. INDIA BALANCE OF PAYMENTS
– Remains manageable
India reported a current account (CA) deficit of
USD14.2bn in 2Q11, which was around 17% YoY
higher than the deficit in 2Q10. The 2Q11 CA
deficit was due to a wider merchandise trade deficit
of USD35.5bn (+11.5% YoY) that was not fully
offset by the 8% YoY increase in the invisible
surplus (which includes remittances and software
exports) to USD21.3bn. The shortfall on investment
income (net) rose to USD4.3bn (2Q10: -USD2.6bn)
due to a combination of higher interest payment and
lower interest earning, the latter being an ongoing
fallout of the record-low international interest rates.
The wider merchandise trade deficit in 2Q11 came
about despite export growth (+45.7% YoY)
outstripping import growth (+33.2%). The surplus
of USD12.1bn (+25.9% YoY) in the service
balance was driven by a 13.2% YoY gain in net
software services (USD14.2bn) and a 4.6% rise in
private transfers (USD13.8bn).

Still, as has been the pattern in recent quarters, the
overall balance of payments (BoP) posted a small
surplus of USD5.4bn, as total capital inflows
(+24.9% YoY) offset the wider CA deficit. While
foreign reserves increased USD10.9bn in 2Q11, half
of the gain (USD5.4bn) was due to valuation caused
by the depreciation of USD against major currencies.
Net FDI encouragingly surged 145.1% YoY to
USD7.2bn in 2Q11, as inbound FDI more than
doubled to USD12.9bn. Net FDI will show a
significant increase in FY12 but the broader policy
framework still needs to be overhauled to make it
more attractive. Portfolio inflows (USD$2.5bn)
were lower while external commercial borrowings
(net) were slightly higher (USD2.9bn).
Barring major global financial dislocation, financing
the CA deficit of USD60.3bn (3% of GDP) in FY12
should be feasible. The net impact of falling
commodity prices will be positive for the CA deficit
provided the decline is more than the depreciation of
INR (see  Infofax Stumped by global risk-off, 29
September). Still, given that despite the ongoing
moderation, India’s GDP growth will be higher than
that of its trading partners, the overall CA deficit will
remain large and will warrant close tracking in the
current backdrop of topsy-turvy global capital flows