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Balance of payments plummets into red. In line with our expectations of negative
overall balance in FY2012, 3QFY12 balance dropped to US$(-)12.8 bn pulling the
balance of payments till date in FY2012 to US$(-)7.1 bn. Current account deficit at
US$19.4 bn (CAD/GDP at 4.3%) was in line with our estimate of US$20 bn. The capital
account balance weakened further to just US$8 bn. We reiterate our view of a negative
overall balance in FY2012 and expect balance of payments in FY2012 at US$(-)7.9 bn
and FY2013 at US$(-)10.8 bn. This is consistent with our view of a depreciating bias on
INR and we expect USD/INR to average 50.50 in FY2013.
Current account continues to follow trend—weakening exports and high imports
The deterioration in the overall balance (US$(-)12.8 bn in 3QFY12 from US$0.3 bn in 2QFY12)
came on the back of a continued high current account deficit and sharp moderation in capital
inflows. The current account deficit continued to be as expected at US$19.4 bn with exports at
US$71.1 bn and imports at US$118.8 bn (implying a trade deficit of US$47.7 bn). Services sector
contribution remained steady with net invisibles increasing by US$3.3 bn to US$28.3 bn. There has
also been an increase in private transfers which came in at US$17.7 bn compared to US$15.6 bn
in 2QFY12. Business and financial services however continued to remain weak at US$(-)0.93 bn
and US$(-)0.49 bn, respectively. Non-software services came in at US$(-)0.8 bn against US$0.4 bn
in 2QFY12 while software services increased by US$2.2 bn to US$15.8 bn.
Capital account balance drops with net outflows in loans to India
Capital flows came down sharply to US$8 bn from US$17.2 bn in 2QFY12. Within this, foreign
investment was positive with total flows improving to US$6.4 bn from US$2.8 bn. This was on the
back of resilient FDI flows at US$4.5 bn and an improvement in FII flows to US$1.8 bn from
US$(-)1.4 bn. The latter picked up after the debt limits for FIIs was increased by US$5 bn each in
the G-sec and corporate bond market in the beginning of December 2011. According to data
released by SEBI, net equity flows in 3QFY12 was at US$(-)0.4 bn while net debt flows was at
US$4 bn with US$3.9 bn in December itself. With relaxations in the NRI deposits space, net flows
through NRI deposits increased further to US$3.3 bn from US$2.8 bn in 2QFY12. The negative
surprise came from the banking capital side with net inflows of US$(-)5.5 bn as banks expanded
their foreign currency assets. Short-term credit at US$(-)0.1 bn weakened further due to funding
pressures in the banking system while net flows through ECBs also decreased to US$1.4 bn from
US$7 bn due to higher repayment of overseas borrowing.
Capital account will be the weak link in FY2013E
Going forward, we expect the current account deficit to remain high as imports continue to
outpace exports and invisible growth remains modest. Thus, the onus will remain on the capital
accounts to bridge the gap. However, with weak domestic fundamentals and stressful global
conditions, we expect capital inflows to come down, resulting in a negative overall balance.
Following FYTD overall balance at US$(-)7.1 bn, we expect it to worsen only marginally to
US$(-)7.9 bn in FY2012. This is based on our expectation of an improvement in the capital account
as FII flows were strong in January and February, and funding pressures eased as global risk
appetite recovered. We expect the overall balance to worsen to US$(-)10.8 bn in FY2013. Risks
remain from high crude prices which can lead to a deterioration of the CAD/GDP (expect at 3.5%
with crude prices at US$110/bbl) versus 3.7% in FY2012. With foreign reserve accretion remaining
negative, we look for a depreciation bias for the Indian Rupee. USD/INR in FY2013 is likely to
average at 50.50 against 47.94 in FY2012.
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