India’s balance of payments (BoP) recorded a small surplus of $1.8 billion (Rs8,118 crore) in Q3FY10, smaller than the surplus of $9.4 billion recorded in the previous quarter. Quarter-on-quarter (q-o-q), there was a slowdown on the capital account side. The current account was largely stable.
Current account deficit stood at around $12 billion during the quarter under review, not showing much movement either on q-o-q or year-on-year (y-o-y) basis. Trade deficit, which was on a widening trend since March 2009, shrunk marginally for the first time (from around $32 billion in Q2 to about $31 billion in Q3). Exports climbed around 13% y-o-y during Q3FY10 after consecutive declines in the previous four quarters. Imports also registered a growth of 2.6% y-o-y after registering declines in the previous three quarters. This largely reflects the ongoing recovery in the domestic economy and global trade.
The invisibles account (net) declined somewhat on sequential basis from $20 billion in Q2FY10 to $18.7 billion in Q3FY10. Among major heads of invisibles, gross software earnings improved. However, the positive effect of increased software earnings was negated by reduction in private remittances.
Graphic: Yogesh Kumar / Mint
Capital account surplus in Q3FY10 at around $14 billion was significantly lower than $21 billion in the previous quarter. The lower capital account surplus had, in fact, been the direct cause of the deceleration in the overall BoP surplus in Q3FY10. Such slowdown in the capital account took place largely on the back of lower foreign direct investment (FDI) and portfolio inflows.
On the portfolio side, decline in both foreign institutional investments (FIIs) and American depositary receipts/global depositary receipts contributed to the trend. However, increase in short-term trade credit compensated somewhat for the decline in foreign investment. The outgoing FDI remained stable, but inward FDI declined.
From an overall deficit of around $20 billion in April-December 2008, BoP turned into a surplus of around $11 billion during the corresponding period in 2009. The large swing was triggered mainly by the capital account. The capital account surplus expanded from a mere around $7 billion during the first nine months of FY09 to around $42 billion during the corresponding period in FY10. This trend can be largely explained by the liquidity injection by major central banks across the globe and the associated recovery in global risk appetite.
Trade deficit also improved over the stated period on account of faster fall in imports as compared with exports. The current account deficit, however, weakened further on account of lower earnings on the invisibles account.
Exports and imports continue to show improvement on sequential basis on the back of recovering global economy. We expect these trends to continue. The risk to that view may, however, arise from the possibility of any added trade protectionism adopted by some of the major economies, which cannot be ruled out.
Software earnings continue to provide support to the invisibles account. However, the rupee appreciation—not just against the dollar but also against the euro and pound—could hurt the invisibles as well as trade account in Q4FY10. Slowdown in FIIs and FDI flows has been observed in Q3FY10, although BoP was still in surplus. Going forward, the global risk appetite would be extremely crucial for FII flows. FDI trends are likely to be more resilient unless there is a fresh bout of global uncertainty.