India Economy - BOP and Foreign Trade by Anand Rathi report

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

India Economy - Balance of Payment - Record current ac deficit in 2Q, to improve hereafter

Commodity imports induced the widening of goods trade deficit, which in turn led to a record high current-account deficit in 2QFY11. Portfolio inflows soared, but most other capital flows deteriorated. We see improvement in both current & capital account balances in 2HFY11 and expect the rupee to appreciate to 42 per US dollar by Mar ’11.

n       Record-high current account deficit. During 2QFY11, current account deficit (CAD) widened to US$15.8bn (4.4% of GDP), the highest quarterly deficit ever recorded by India.

n       Jump in goods trade deficit. Despite higher growth in exports vs. imports, merchandise trade deficit increased to US$35.4bn in 2QFY11 from US$29.6bn in 2QFY10 and US$31.6bn in 1QFY11.

n       Software exports rise, remittances fall. Software exports rose to US$12.2bn in 2QFY11 as against US$10.8bn in 2QFY10. Workers’ remittances, however, declined to US$13.0bn in 2QFY11 from US$13.8bn in 2QFY10.

n       Non-software services continue to drag. Despite improvements over previous quarter, the balance of non-software services exports in 2QFY11 remained in deficit (US$1.7bn) for the sixth consecutive quarter.

n       Explosive portfolio capital inflow. During 2QFY11, capital account surplus widened to US$20.5bn from US$19.3bn in 2QFY10 and US$16.2bn in 1QFY11. This was mainly due to surge in portfolio inflows (US$19.2bn) as against deterioration of all other major capital flows except ECBs over 1QFY11.

n       Reserve accretion continues. With capital account surplus higher than the CAD, net of valuation changes, India’s foreign exchange reserves increased US$3.3bn in 2QFY11.

n       Outlook. The widening of CAD in 2QFY11 is due to rise in merchandise trade deficit. This, in turn, reflects higher commodity imports (e.g., food, metals, precious stones). We expect merchandise deficit to decrease in the next two quarters. Also, we estimate rise in invisible surplus in 3Q and 4Q. We expect the CAD to fall to US$17bn in 2HFY11 from US$28bn in 1HFY11. While the record-high portfolio inflows are unlikely to sustain, we expect improvement in almost all other capital inflows. We believe capital account surplus will rise, from US$37bn in 1HFY11 to US$50bn in 2HFY11. With improvement in both current and capital account, we maintain our call of the rupee at 42 per US dollar by Mar ’11.