India’s Current Account Deficit Narrows Sharply in Q3; Reserves up by $21.6 Billion

India’s current account deficit (CAD) narrowed sharply to $1.4 billion or 0.2% of GDP in Q3 of 2019-20 from $17.7 billion (2.7% of GDP) in Q3 of 2018-19 and $6.5 billion (0.9% of GDP) in Q2 of 2019-20, the Reserve Bank of India said on Thursday. The contraction in CAD in Q3 was primarily on account of a lower merchandise trade deficit at $34.6 billion (against $49.5 billion in year ago quarter and $38 billion in the preceding quarter). On a balance of payment basis, the country’s forex reserves saw net accretion of a robust $21.6 billion in the December quarter, thanks to the shrinking of CAD and robust net FDI and portfolio inflows that drove the capital account to a surplus of $22.4 billion.

In Q2FY20, capital inflows remained subdued (surplus was just $12 billion); despite the CAD being benign even then, the accretion to the reserves in Q2 was just $5.1 billion. In Q3FY19, the reserves actually depleted $4.3 billion.

As for the current quarter (Q4FY20), the CAD might again be relatively benign. Though merchandise trade deficit rose to a seven-month high of $15.2 billion, the fall in oil prices could potentially bring down import bill in February-March and curb the trade deficit. However, the pull-out by FPIs from Indian markets in recent weeks could weaken the capital account. FPIs have sold Indian equities worth $1.3 billion since the beginning of the year on a net basis. At the same time, they have sold over $2.7 billion worth of Indian bonds in 2020 so far.

Net services receipts too increased in Q3FY20 to $21.9 billion compared with $20.4 billion in Q2. Private transfer receipts, mainly representing remittances by Indians employed overseas, increased to $ 20.6 billion in Q3FY20, up 9% from the level a year ago.

The RBI said that in the financial account, net foreign direct investment at $10 billion was higher than $ 7.3 billion in Q3 of 2018-19. Foreign portfolio investment recorded net inflow of $7.8 billion in Q3 this fiscal as against an outflow of $2.1 billion in the year ago quarter – on account of net purchases in both the debt and equity markets. “Net inflow on account of external commercial borrowings to India was $3.2 billion as compared with $2 billion in Q3 of 2018-19.”

According to the RBI, the CAD narrowed to 1% per cent of GDP in April-December of 2019-20 from 2.6% in April-December of 2018-19 on the back of a reduction in the trade deficit which shrank to $118.9 billion in April-December 2019-20 from $145.1 billion in April-December of 2018-19. Net invisible receipts were higher in April-December of 2019-20, mainly due to increase in net services earnings and private transfer receipts.

Net FDI inflows at $32.1 billion in April-December of 2019-20 were higher than $24.3 billion in April-December of 2018-19. Portfolio investment recorded a net inflow of $15.1 billion in April-December of 2019-20 as against an outflow of $11.9 billion a year ago.

In April-December 2019-20, there was an accretion of $40.7 billion of the foreign exchange reserves on a BoP basis.

Source: Financial Express

Image Courtesy: ShutterStock