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Current account deficit narrows to 0.9% in September quarter

According to the RBI, the contraction in the CAD was primarily on account of a lower trade deficit at $38.1 billion as compared with $50.0 billion a year ago.

By: ENS Economic Bureau | Mumbai |
January 1, 2020 1:56:51 am
core sectors growth, Indian economy, economic slowdown, India Current account deficit, account deficit, RBI on account deficit, indian express “Private transfer receipts, mainly representing remittances by Indians employed overseas, rose to $ 21.9 billion, increasing by 5.2 per cent from their level a year ago,” the RBI said. (File)

India’s current account deficit (CAD) narrowed to 0.9 per cent of GDP ($ 6.3 billion) for the second quarter ended September 30, 2019 from 2.9 per cent of GDP ($9 billion) in the same period of 2018-19 and $14.2 billion (2 per cent of GDP) in the preceding quarter ended June 30, 2019.

According to the RBI, the contraction in CAD was primarily on account of a lower trade deficit at $38.1 billion, compared to $50 billion a year ago. “Net services receipts increased by 0.9 per cent on a year-on-year basis, on the back of a rise in net earnings from computer, travel and financial services.

“Private transfer receipts, mainly representing remittances by Indians employed overseas, rose to $ 21.9 billion, increasing by 5.2 per cent from their level a year ago,” the RBI said.

In the financial account, net foreign direct investment was $7.4 billion, almost same level as in Q2 of 2018-19. Foreign portfolio investment recorded net inflow of $2.5 billion, as against an outflow of $1.6 billion in Q2 of 2018-19, on account of net purchases in the debt market.

The RBI said net inflow on account of external commercial borrowings to India was $3.2 billion, compared to $2 billion in Q2 of 2018-19. “There was an accretion of $5.1 billion to the foreign exchange reserves (on BoP basis), as against a depletion of $1.9 billion in Q2 of 2018-19, the RBI said.

According to the central bank, the CAD narrowed to 1.5 per cent of GDP in the first half of 2019-20 from 2.6 per cent in H1 of 2018-19 on the back of a reduction in the trade deficit, which shrank to $84.3 billion in H1 of 2019-20 from $ 95.8 billion in H1 of 2018-19.

Aditi Nayar, principal economist at ICRA, said, “The current account deficit for Q2 of FY2020 printed even lower than our expectations of around $ 9 billion, led by a narrower trade deficit and higher secondary income flows. Based on the available trends for merchandise trade for October-November 2019, we expect the current account deficit to shrink further to $4-6 billion in Q3 of FY2020 (and print at 0.7 per cent of GDP) from $16.9 billion in Q3 FY2019, on the back of the YoY correction in crude oil prices as well as subdued domestic demand.”

“We are cautiously optimistic that the recent YoY rise in non-oil merchandise exports may sustain in December 2019-February 2020, although an unfavourable base effect may result in a contraction in March 2020. While a pickup in the prices of crude oil and gold, as well as the base effect, may arrest the pace of contraction in imports in the coming months, the impact of this on the overall trade deficit is likely to be limited,” Nayar said. Merchandise exports and imports are likely to decline to $ 332-337 billion and $ 493-498 billion, respectively, in FY2020. Accordingly, the merchandise trade deficit is likely to narrow considerably to $160-165 billion in FY2020 from $180.3 billion in FY2019.

“The anticipated narrowing in the trade deficit in FY2020 reflects the decline in merchandise imports on account of the subdued global commodity prices, and shrinking in gold demand at prevailing prices, and also reflects muted domestic consumption and industrial demand, rather than a healthy trend in merchandise exports,” Nayar said.

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