J.P. Morgan - India's CAD expectedly stays contained and BoP surges into surplus

India’s CAD expectedly stays contained and BoP surges into surplus in 4Q13; maintaining full year CAD at 2% of GDP

Markets had expected a benign 4Q13 CAD print as the monthly trade deficits had continued to stay contained during the quarter. However, the CAD positively surprised even those benign expectations printing at 0.9% of GDP ($ 4.1 bn) versus our expectations of 1.2% of GDP. The positive surprise was underpinned by inward remittances remaining solid, while we had feared some cannibalization into the attractive NRI deposit scheme that was in operation during the quarter. Other CAD dynamics were in line with expectations: exports remained flat (quarter on quarter) reflecting some drop-off in momentum after the surge in 3Q13. But this was offset by gold imports remaining highly compressed for a second successive quarter ($3.1 bn in 4Q versus $3.9 bn in 3Q and $16.5 bn in 2Q) and non-oil, non-gold imports contracting further on a sequential basis, reflecting weak growth impulses.

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These dynamics reinforce our view that the full-year CAD for FY14 (year ending March 2014) will print close to 2% of GDP – a dramatic compression from last year’s 4.7% level – and symptomatic of the external adjustment in India over the last two quarters. Equally expected was the fact that the BoP surged into a surplus, underpinned by the success of the RBI’s subsidized swap scheme to attract banking capital flows. Recall the bulk of the $34 billion that came in under the scheme were received in 4Q, boosting the capital account. This was complemented by a swing of almost $9 bn in portfolio flows across 3Q and 4Q (an outflow of $6.6 bn turning into a net inflow of $2.4 bn) as EMs benefitted from the pushing out of the taper. While net FDI flows disappointed ($6.1 bn versus $8.1 bn in 3Q), the pick-up in banking capital and portfolio flows was enough for the capital account to turn around dramatically – printing at almost $24 bn in 4Q versus an outflow of almost $5 bn in 3Q. With the current account remaining flat and the capital account turning around dramatically, the BoP surged into a surplus of $19.1 bn in 4Q verses a deficit of $10.3 bn in 3Q. This swing of almost $30 bn was largely driven by the $34 bn attracted under the banking capital scheme, and underpinned the Rupee’s rebound in 4Q13. India: Quarterly BoP       ($ billions) Jun, 2013 Sep, 2013 Dec, 2013         Exports 73.9 81.2 79.8 Imports 124.4 114.5 112.9 Oil 42.0 41.0 42.0 Gold 16.5 3.9 3.1 Other 65.9 69.7 67.8 Trade balance -50.5 -33.3 -33.2 % of GDP -11.3 -7.9 -7.0 Invisibles 28.7 28.1 29.1 Services 16.9 18.4 18.1 ow: Software Services 16.1 16.3 16.8 Transfers 16.7 16.1 16.4 Net Investment Income -4.8 -6.3 -5.4 Current Account Balance -21.8 -5.2 -4.1 % of GDP -4.9 -1.2 -0.9         Capital Account 20.5 -4.8 23.8 % GDP 4.6 -1.1 5.0 FDI 6.5 8.1 6.1 Portfolio Investment -0.2 -6.6 2.4 Loans 3.6 -0.5 3.0 Net External Commercial Borrowings (ECB) 0.9 1.6 4.2 Short term credit 2.5 -1.9 -1.2 Banking Capital 10.3 1.16 15.8 NRI deposit 5.5 8.2 21.4 Bank borrowing 4.8 -7.0 -5.8 Other 0.1 0.0 0.2 Rupee debt service 0.0 0.0 0.0 Other Capital 0.3 -6.9 -3.4 Overall Balance -0.4 -10.4 19.1 Errors and Omissions 0.9 -0.4 -0.6 Reserves Depletion 0.4 10.4 -19.1 Source: RBI