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Economy
Balance of Payments
Balance of payments on a knife-edge. With a deteriorating CAD and a weakening
capital account balance, India’s overall balance in 2QFY12 stood at US$0.3 bn only. The
CAD/GDP fell to 3.7% from 3.5% in 1QFY12. The capital account balance saw a drop
to US$18.4 bn from US$22.7 bn in 1QFY12 with the foreign investment flow slowing
down to US$3.2 bn from US$10.5 bn in 1QFY12. This deterioration in the overall
balance of payments is in line with our expectations of a negative balance for FY2012E
signaling dollar sales by the RBI in the forex market
Imports continue to remain strong; current account is a lesser evil in 2QFY12
Even though exports grew by ~47%, imports remained strong with a growth of ~35%, thereby
leading to a widening of the trade balance by (-)2.1 bn from 1QFY12 to US$43.9 bn. Services
sector contribution remained steady with net invisibles increasing by US$1.1 bn. There has also
been an increase in private transfers which came in at US$16.2 bn compared to US$14.8 bn in
1QFY12. Business and financial services however continued to remain weak at US$(-)0.97 bn and
US$(-)0.67 bn, respectively. Overall, the current account balance turned out to be the less
damaging and the downside was more from the weakening capital account side. Current account
deficit in 2QFY12 was at US$(-)16.9 bn, higher than US$(-)15.9 bn in 1QFY12. Incidentally, the
exports numbers for 1QFY12 were revised lower in line with the revision in the DGCI&S data to
US$74.3 bn from earlier estimates of US$80.6 bn.
Foreign investment flows drying up leads to lower overall balance
Both net FDI and net FII flows slowed down markedly to lead to a weakening in the capital
account. Net FDI was at US$4.4 bn (US$7.9 bn in 1QFY12) and net FII flows was at US$(-)1.4 bn
(US$2.3 bn in 1QFY12). Banking capital at US$6.7 bn also weakened from US$12.7 bn as asset
sale by the Indian banks were lower in 2QFY12. On the positive side, though, ECBs and NRI
deposits have picked up sharply. ECBs in 2QFY12 were at US$7 bn (US$3.6 bn in 1QFY12) while
NRI deposits were at US$2.8 bn (US$1.2 bn in 1QFY12). We expect NRI deposits to stay strong
with higher interest rates now offered by the Indian banks. Pace of net ECB inflows could weaken
with redemption pressures in the near term and with global banks on a deleveraging mode.
Overall, capital account balance in 2QFY12 weakened to US$18.4 bn from US$22.7 bn.
Balance of payments to remain on a weakening trend
India is faced with a structural current account deficit situation with the current account balance
likely to be at around US$78.5 bn (4.2% of GDP) for FY2012E. The onus of balancing thus rests
on the capital account. However, given the weakening domestic fundamentals as also the stressful
global financial conditions, it is becoming challenging to attract adequate flows to bridge the
current account gap. In October and September, data for which is officially available from the RBI,
dollar sales to contain the depreciation pressure of the INR was at around US$1.8 bn. Further, we
estimate that there could have been sale of around US$4-5 bn in November.
We expect overall balance in FY2012E at around US$(-)6.5 bn. Though challenging, it is yet very
alarming, given that the foreign currency assets with the RBI is still at around US$266 bn.
However, this assumes that the global conditions do not deteriorate further. If it does, then the
capital account could weaken further without any substantial benefit from the current account
side (as oil prices might not soften significantly). For FY2013E, the situation could actually be
weaker from the capital flows perspective while some benefit could be derived from the trade side
as oil prices fall due to weakening global demand. Overall, the balance of payments conditions
warrant us to stay with a depreciated bias for INR, likely to average at 53.50 in 4QFY13.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
Balance of Payments
Balance of payments on a knife-edge. With a deteriorating CAD and a weakening
capital account balance, India’s overall balance in 2QFY12 stood at US$0.3 bn only. The
CAD/GDP fell to 3.7% from 3.5% in 1QFY12. The capital account balance saw a drop
to US$18.4 bn from US$22.7 bn in 1QFY12 with the foreign investment flow slowing
down to US$3.2 bn from US$10.5 bn in 1QFY12. This deterioration in the overall
balance of payments is in line with our expectations of a negative balance for FY2012E
signaling dollar sales by the RBI in the forex market
Imports continue to remain strong; current account is a lesser evil in 2QFY12
Even though exports grew by ~47%, imports remained strong with a growth of ~35%, thereby
leading to a widening of the trade balance by (-)2.1 bn from 1QFY12 to US$43.9 bn. Services
sector contribution remained steady with net invisibles increasing by US$1.1 bn. There has also
been an increase in private transfers which came in at US$16.2 bn compared to US$14.8 bn in
1QFY12. Business and financial services however continued to remain weak at US$(-)0.97 bn and
US$(-)0.67 bn, respectively. Overall, the current account balance turned out to be the less
damaging and the downside was more from the weakening capital account side. Current account
deficit in 2QFY12 was at US$(-)16.9 bn, higher than US$(-)15.9 bn in 1QFY12. Incidentally, the
exports numbers for 1QFY12 were revised lower in line with the revision in the DGCI&S data to
US$74.3 bn from earlier estimates of US$80.6 bn.
Foreign investment flows drying up leads to lower overall balance
Both net FDI and net FII flows slowed down markedly to lead to a weakening in the capital
account. Net FDI was at US$4.4 bn (US$7.9 bn in 1QFY12) and net FII flows was at US$(-)1.4 bn
(US$2.3 bn in 1QFY12). Banking capital at US$6.7 bn also weakened from US$12.7 bn as asset
sale by the Indian banks were lower in 2QFY12. On the positive side, though, ECBs and NRI
deposits have picked up sharply. ECBs in 2QFY12 were at US$7 bn (US$3.6 bn in 1QFY12) while
NRI deposits were at US$2.8 bn (US$1.2 bn in 1QFY12). We expect NRI deposits to stay strong
with higher interest rates now offered by the Indian banks. Pace of net ECB inflows could weaken
with redemption pressures in the near term and with global banks on a deleveraging mode.
Overall, capital account balance in 2QFY12 weakened to US$18.4 bn from US$22.7 bn.
Balance of payments to remain on a weakening trend
India is faced with a structural current account deficit situation with the current account balance
likely to be at around US$78.5 bn (4.2% of GDP) for FY2012E. The onus of balancing thus rests
on the capital account. However, given the weakening domestic fundamentals as also the stressful
global financial conditions, it is becoming challenging to attract adequate flows to bridge the
current account gap. In October and September, data for which is officially available from the RBI,
dollar sales to contain the depreciation pressure of the INR was at around US$1.8 bn. Further, we
estimate that there could have been sale of around US$4-5 bn in November.
We expect overall balance in FY2012E at around US$(-)6.5 bn. Though challenging, it is yet very
alarming, given that the foreign currency assets with the RBI is still at around US$266 bn.
However, this assumes that the global conditions do not deteriorate further. If it does, then the
capital account could weaken further without any substantial benefit from the current account
side (as oil prices might not soften significantly). For FY2013E, the situation could actually be
weaker from the capital flows perspective while some benefit could be derived from the trade side
as oil prices fall due to weakening global demand. Overall, the balance of payments conditions
warrant us to stay with a depreciated bias for INR, likely to average at 53.50 in 4QFY13.
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