Current account deficit at 0.1% of GDP in April-June quarter

The deficit was much narrower than a deficit of $6.1 billion, or 1.2% of GDP, in the same quarter a year ago

Photo: Pradeep Gaur/Mint
Photo: Pradeep Gaur/Mint

India posted a current account deficit (CAD) of $277 million, or 0.1% of gross domestic product (GDP), in the April-June quarter—same as in the preceding quarter—belying expectations of a surplus, data released by the Reserve Bank of India (RBI) showed.

Citibank NA, in a research note released on Monday, had estimated a current account surplus of $2 billion or 0.4% of GDP.

In the same quarter a year ago, India posted a CAD of $6.1 billion, or 1.2% of GDP.

The contraction in the CAD in the June quarter was primarily on account of a narrowing of the trade deficit to $23.8 billion from $34.2 billion a year ago. India’s merchandise exports and imports have been declining since December 2014—barring in June this year—because of sluggish global demand and low commodity prices. In August, exports showed signs of stabilizing, contracting only by 0.3%.

Net services exports dropped to $15.8 billion in the June quarter from $17.8 billion in the same quarter a year ago, largely due to a fall in net earnings on account of travel, financial services and other business services.

Private transfer receipts, mainly representing remittances by overseas Indians, continued to decline, amounting to $15.2 billion in the June quarter, from $15.7 billion in the preceding quarter.

Aditi Nayar, senior economist at ICRA Ltd, said a sharp fall in gold imports and the continuing benefit of a lower oil import bill limited the CAD, offsetting the drag exerted by the narrower surplus in services trade and lower remittances.

“With crude oil prices likely to remain range-bound, the extent of revival in gold imports during the remainder of this fiscal, particularly during the festive season, would critically impact the size of the current account deficit. In addition to the existing weak global growth outlook, uncertainty post-Brexit and in the run-up to US Presidential elections, may curtail fresh orders for merchandise and services exports,” she added.

ICRA expects a current account deficit of $20-25 billion in 2016-17 compared to $22 billion in 2015-16.

Net foreign direct investment (FDI) moderated to $4.1 billion in the June quarter from $8.8 billion in the preceding quarter, while portfolio investments rose to $2.1 billion from $1.5 billion during the same period, primarily reflecting net inflows in the equity segment.

The Economic Survey of 2015-16 said India’s external sector outcome continues to be strong and sustainable because of strong macroeconomic fundamentals and low commodity prices.

“As such, while the export slowdown may continue for a while before picking up next fiscal, the continuance of low global commodity prices augurs well for sustaining low trade and current account deficits,” the survey added.

In the short run, the challenge for current account deficit will be redemption of $25 billion in foreign currency non-resident (FCNR) deposits that were raised in 2013 to protect the rupee.

About four-fifths of these are unlikely to be rolled over, which could result in $20 billion in outflows in the September-November period.

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