India’s current account deficit slips to 0.2% of GDP in March quarter
2 min read 10 Jun 2015, 06:01 PM ISTA low current account deficit will support rupee, help India tackle capital outflows if the US Fed hikes interest rates
Premium
New Delhi: In a signal that external sector worries have abated at least for now, India’s current account deficit (CAD) in the last quarter of 2014-15 came in at $1.3 billion or 0.2% of gross domestic product (GDP), helped by a lower trade deficit.
A low current account deficit will support the rupee and help India counter possible capital outflows in the event of a hike in interest rates by the US Federal Reserve later this year.
The current account deficit—the sum of the balance of trade and invisibles, such as remittances and software earnings—was at 1.6% of GDP in the preceding quarter and 0.2% of GDP in the corresponding year-ago period.
A fall in crude oil prices to less than $65 per barrel in the last few months helped India reduce its import bill at a time when exports have been stagnant on account of a weak global economy.
In the January-March quarter, trade deficit was at $31.7 billion, with both exports and imports moderating to $70.7 billion and $102.4 billion, respectively, as per balance of payments data released by the Reserve Bank of India. Gold imports, however, remained high at $8.5 billion.
For the full year, the current account deficit was at 1.3% of GDP, lower than 1.7% of GDP in 2013-14. “The narrowing of India’s current account deficit from the alarming levels above 4% of GDP in 2011-13, to an average of 1.5% of GDP in the subsequent two years ending 2014-15, represents a meaningful reduction in external account vulnerability, even though a portion of this benefit is derived from lower commodity prices," said Aditi Nayar, senior economist at rating agency ICRA said in a note.
Robust capital flows—both portfolio and foreign direct investment—were more than sufficient to meet the current account deficit, with the highest ever addition made to India’s foreign exchange reserves in the March quarter. “There was highest ever net accretion of $30.1 billion to India’s foreign exchange reserves in a single quarter; it was more than double the accretion in the preceding quarter and almost four times of the reserves accrued in Q4 of 2013-14," the RBI said.
Madan Sabnavis, chief economist at Care Ratings, said going ahead, the current account deficit should be range-bound. “Under the current conditions of low crude oil prices in the range of $60-70 per barrel, stagnant exports given the limited pick-up in world economy, and some pick-up in software receipts, current account deficit would be in the range of 1.5%-2% of GDP this year," he said. “Capital flows would, however, be impacted due to the US Federal Reserve’s move on interest rates," he said adding that while the balance of payments would be positive, the accretion to reserves could be of a lower magnitude.
