CAD Improves: India Ratings & Research (Ind-Ra) expects the current account deficit (CAD) to be lower in the remaining quarters of the FY14 than the corresponding quarters in FY13 in view of a pick-up in exports and a significant drop in gold imports. CAD improved to USD5.2bn (1.2 percent of GDP, lowest since 2010) in 2QFY14 from USD21.8bn (4.9 percent of GDP) in 1QFY14. The key reason for improvement was higher exports and moderation in imports, particularly of gold imports. Gold imports dropped to USD3.6bn in 2QFY14 from USD16.4bn in 1QFY14. Hike in import duties on gold and other measures taken by the government to curb the gold imports appear to be paying off.
Export Gathers Pace: Despite the uneven global recovery, Ind-Ra believes the momentum witnessed in exports growth will continue in the near term as there are signs of improvement in both the US and the core economies of Eurozone. While the US is expected to grow at 1.6 percent in 2013, Germany and France are expected to grow at 0.5 percent and 0.2 percent, respectively, according to the latest International Monetary Fund estimate. These countries are expected to do even better in 2014. An improvement in the demand conditions in advanced economies coupled with rupee depreciation is helping merchandise exports. It increased 11.9 percent to USD81.2bn in 2QFY14 from USD73.9bn in 1QFY14. The depreciation of rupee has improved the international competitiveness of Indian exports particularly of textile and textile products, leather and leather products and chemicals.
Import Declines: On the other hand, merchandise imports at USD114.5bn declined 4.8 percent in 2QFY14 from 3.0 percent in 2QFY13. Consequently, trade deficit narrowed to USD33.3bn in 2QFY14 from USD47.8bn a year ago. Due to the nuclear deal with Iran, the tension in the Middle-East is likely to ease leading to reduced volatility in crude prices. Although Ind-Ra expects some pick up in imports growth in 2HFY14, it will be limited due to stable crude prices and lower gold imports.
Remittance Stagnant: Remittances from aboard have stagnated at around USD15bn-USD16bn for several quarters. Even in 2QFY14, at USD16.1bn, it has remained in the same range. However, net invisibles at USD28.1bn in 2QFY14 were higher than INR26.6bn in 2QFY13. This essentially reflects the rise in net services exports. Net services exports at USD18.4bn recorded a growth of 12.5 percent yoy in 2QFY14 mainly on account of computer services.
Net Capital Inflow Turns Negative: Net inflow under the capital and financial account declined by USD5.3bn in 2QFY14 compared with an addition of USD20.5bn during 1QFY14. Despite a net inflow under the foreign direct investment (FDI), external commercial borrowing and banking capital heads, capital and financial account witnessed a net outflow owing to net huge outflow under the head of portfolio investment and other capital.
Forex Reserve Drawdown: Despite lower CAD in 2QFY14, there was a drawdown of forex reserve to the tune of USD10.4bn from a drawdown of USD0.2bn in 2QFY13 and USD0.3bn in 1QFY14 on a balance of payment (BoP) basis. The forex reserve drawdown for 1HFY14 stands at USD10.7bn. Clearly, a decline in CAD alone is not going to shore up the BoP; attracting inflows through the capital and financial account is equally important to improve BoP and reduce the pressure on rupee to depreciate. Although attracting inflows via FDI is always better, the other routes including the swap window introduced by the Reserve Bank of India will be helpful in the short term.
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