India: Current account deficit widens, financing risk remains :: Macquarie Research,

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India: Current account deficit widens,
financing risk remains
Event
 India announced balance of payment (BoP) data for the June 2011 quarter.
Impact
 India’s current account deficit widened to US$14.2bn (3.2% of GDP,
annualized) in the June quarter from US$5.4bn in the previous quarter. The
deficit in the June quarter was above market expectations (as per Bloomberg
survey of US$10.8bn).
 Trade deficit widened to US$35.5bn (7.9% of GDP, annualized) during the
June quarter compared with a deficit of US$29.9bn in the March quarter.
While goods export growth remained largely stable at 45.7%YoY in the June
quarter (vs. 47%YoY earlier), import growth accelerated to 33.2%YoY from
27.4%YoY in the March quarter. Non-monetary gold imports increased by
58.7%YoY in the June quarter to US$10.2bn.
 Net invisibles growth decelerated to 8%YoY during the June quarter from
30.4%YoY in the previous quarter mainly on lower software services export
growth (13.2% YoY vs. 19.3% YoY in the March quarter) and investment
income outflows due to persistence of lower interest rate abroad. The growth
in remittances from non-resident Indians was largely stable on a QoQ basis
but decelerated on a YoY basis to 5%YoY (vs. 10%YoY in March quarter).
 Capital flows increased to US$20.9bn (4.7% of GDP, annualized) in the June
quarter from US$8.2bn in the previous quarter. While the flows picked up
across the board, the biggest swing came from banking capital and FDI flows.
The net FDI inflows accelerated to US$7.2bn from US$0.6bn in the previous
quarter. The banking capital flows also increased sharply to US$12.7bn (after
declining US$0.8bn in the March quarter) mainly due to drawdown of bank’s
foreign currency assets held abroad as well as a rise in overseas borrowings.
 Balance of payments (BOP) surplus increased to US$5.4bn in the June
quarter from US$2bn in the previous quarter.
Outlook
 Financing risk remains in the near term on deteriorating global
environment: We expect the current account deficit to remain high at 2.7% of
GDP for FY12. We maintain our view that global growth uncertainty will weigh
on the export growth in the coming quarters. At the same time, while
moderation in domestic demand will help check non-oil import growth, the
resilience in global commodity prices will prevent overall import growth from
moderating sharply. We believe that while the current account deficit has
been manageable so far in view of continued capital flows, financing risk from
any sharp risk aversion in the global capital markets resulting in a slowdown
in capital flows remains.
Separately, the RBI this time also released the BoP data as per the revised format of BoP
presentation provided in IMF's BPM6. However, as historical trend in the new BoP format is not
available, we have still used the old format for analysis.