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India April-June balance of payments: Current account deficit
back to high levels—further risks ahead
The current account deficit for 1QFY12 almost tripled to 3.1% of GDP from 1.1% of GDP in 4QFY11. In
absolute terms, the current account deficit also increased substantially to US$14.1 billion from US$5.4 billion in the
previous quarter. The deficit was much higher than the Bloomberg consensus expectation of US$10.8 billion and
our expectation of US$8.5 billion.
A higher-than-expected current account deficit was driven by a larger merchandise trade deficit as well as
a lower services surplus. The merchandise trade deficit increased to US$35.4 billion from US$29.7 billion in 4Q
FY11 despite a sharper increase in goods exports. Net export of services decreased from the previous quarter
partly due to weaker IT exports. Workers’ remittances remained largely flat.
The financial account surplus increased due to a jump in FDI and banks bringing in USD funds.
1
The
financial account surplus increased to US$15.4 billion from US$6.2 billion in the previous quarter. This was led by a
jump in net FDI to US$7.2 billion from US$0.6 billion, as well as banks borrowing abroad and drawing down their
foreign currency assets to US$11.5 billion from -US$2.7 billion. Net portfolio investments, external commercial
borrowings, and other investments all showed an increase compared to the previous quarter. The net addition to
FX reserves was US$5.4 billion during 1QFY12 (excluding valuation effects)—now able to fund 7.5 months of
imports as compared to 8 months in the previous quarter.
External debt increased further to US$317 billion from US$306 billion in the previous quarter. About 70% of
the increase in total external debt was due to increases in commercial borrowings and short-term trade credits
reflecting increasing imports. Short-term debt increased to US$68.4 billion from US$56.4 billion—accounting for
21.6% of the total external debt. India’s international investment deficit position also worsened commensurately.
The latest reading shows that India’s current account deficit remains at an elevated level, without much
room for comfort. Since we flagged the worsening current account as a key medium-term vulnerability in
November 2010 (see India’s current account problem, Asia Economics Flash, November 16, 2010), the deficit
numbers have been very volatile—first widening, then falling, and now rising above the 3% level. Weakness in
external demand, resilient commodity prices and the current depreciation of the INR may continue to impact the
current account. We therefore expect the deficit to remain at an elevated level, at 3.4% of GDP in FY12, giving little
room for comfort.
We continue to watch the rising external and short-term debt ratios with caution. Although the rise in FDI in
the quarter is a favorable development, and external and short-term debt ratio levels remain low, we continue to
advise watching the upward trajectory in these ratios very carefully. While there is no clear and present danger to
the balance of payments due to a sizable foreign reserves cushion, the uncertain global macro environment and its
negative impact on capital flows and the balance of payments warrants caution.
The impact of global headwinds and the basic balance of payments remaining in deficit, we think, it is
likely to be negative for the INR, though the current sell-off due to contagion effects appears excessive. Our 3, 6,
and 12-month USD/INR forecasts are under review.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India April-June balance of payments: Current account deficit
back to high levels—further risks ahead
The current account deficit for 1QFY12 almost tripled to 3.1% of GDP from 1.1% of GDP in 4QFY11. In
absolute terms, the current account deficit also increased substantially to US$14.1 billion from US$5.4 billion in the
previous quarter. The deficit was much higher than the Bloomberg consensus expectation of US$10.8 billion and
our expectation of US$8.5 billion.
A higher-than-expected current account deficit was driven by a larger merchandise trade deficit as well as
a lower services surplus. The merchandise trade deficit increased to US$35.4 billion from US$29.7 billion in 4Q
FY11 despite a sharper increase in goods exports. Net export of services decreased from the previous quarter
partly due to weaker IT exports. Workers’ remittances remained largely flat.
The financial account surplus increased due to a jump in FDI and banks bringing in USD funds.
1
The
financial account surplus increased to US$15.4 billion from US$6.2 billion in the previous quarter. This was led by a
jump in net FDI to US$7.2 billion from US$0.6 billion, as well as banks borrowing abroad and drawing down their
foreign currency assets to US$11.5 billion from -US$2.7 billion. Net portfolio investments, external commercial
borrowings, and other investments all showed an increase compared to the previous quarter. The net addition to
FX reserves was US$5.4 billion during 1QFY12 (excluding valuation effects)—now able to fund 7.5 months of
imports as compared to 8 months in the previous quarter.
External debt increased further to US$317 billion from US$306 billion in the previous quarter. About 70% of
the increase in total external debt was due to increases in commercial borrowings and short-term trade credits
reflecting increasing imports. Short-term debt increased to US$68.4 billion from US$56.4 billion—accounting for
21.6% of the total external debt. India’s international investment deficit position also worsened commensurately.
The latest reading shows that India’s current account deficit remains at an elevated level, without much
room for comfort. Since we flagged the worsening current account as a key medium-term vulnerability in
November 2010 (see India’s current account problem, Asia Economics Flash, November 16, 2010), the deficit
numbers have been very volatile—first widening, then falling, and now rising above the 3% level. Weakness in
external demand, resilient commodity prices and the current depreciation of the INR may continue to impact the
current account. We therefore expect the deficit to remain at an elevated level, at 3.4% of GDP in FY12, giving little
room for comfort.
We continue to watch the rising external and short-term debt ratios with caution. Although the rise in FDI in
the quarter is a favorable development, and external and short-term debt ratio levels remain low, we continue to
advise watching the upward trajectory in these ratios very carefully. While there is no clear and present danger to
the balance of payments due to a sizable foreign reserves cushion, the uncertain global macro environment and its
negative impact on capital flows and the balance of payments warrants caution.
The impact of global headwinds and the basic balance of payments remaining in deficit, we think, it is
likely to be negative for the INR, though the current sell-off due to contagion effects appears excessive. Our 3, 6,
and 12-month USD/INR forecasts are under review.
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