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CAD narrows to 1.2% of GDP, lowest since 2010

But balance of payments deficit in second quarter surges due to slowing capital inflows

Read more on:    Q2 | Trade Deficit | Current Account Deficit
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Reserve Bank of India (RBI) Governor Raghuram Rajan seems to have made springing pleasant surprises a habit. In yet another break from tradition, RBI on Monday released the (CAD) figures for the July-September quarter a month ahead of the usual December-end schedule.

The data showed a huge drop in the CAD numbers, which would provide further relief to the rupee, as markets prepare to face tapering of the US Federal Reserve’s asset purchase plan. CAD for the quarter ended September narrowed sharply to $ 5.2 billion, or 1.2 per cent of gross domestic product (GDP), from $21 billion (5 per cent of GDP) in the year-ago period, mainly due to curbs on imports of non-essential items like gold and a pick-up in exports. This, according to Bloomberg data, is also the lowest deficit figure since 2010.

RBI said CAD had come down in the quarter primarily on account of a decline in — merchandise exports picked up and imports, particularly of gold, moderated. Trade deficit contracted to $33.3 billion in the quarter from $47.8 billion a year ago.

On a sequential basis, too, the deficit was much lower than the 4.9 per cent of GDP in the first quarter of the financial year. The central bank expects CAD for full 2013-14 to be about $56 billion (less than 3 per cent of GDP), compared with $88 billion (4.8 per cent of GDP) in the previous financial year.

The quarter saw a significant fall in trade deficit, as imports fell sharply, while exports picked up. Compared with the second quarter of 2012-13, merchandise exports were up 12 per cent to $81.2 billion, while imports declined 4.8 per cent to $114.5 billion. Gold imports in the quarter dropped to $3.9 billion from $16.4 billion in the first quarter and $11.1 billion in the corresponding year-ago period, showed balance of payments data, released by RBI on Monday.

Improvement in service exports helped increase net invisibles, further aiding a fall in current account deficit.

The balance of payments deficit, however, surged, primarily due to slowing capital inflows. There was a drawdown of $10.4 billion from the country’s foreign exchange reserves to fund the deficit, compared with $200 in the same period a year ago.

CRISIL Principal Economist D K Joshi said the sharp drop in CAD was expected due to a decline in gold imports, following stringent restrictions. “While there could be increase in deficit later, it will remain around the central bank’s estimates for 2013-14,” he said.

The deficit numbers will definitely improve sentiment in the foreign exchange market, despite RBI shutting its special dollar window for oil marketing companies. In addition, the $34 billion mobilised by the swap windows for FCNR(B) funds, according to latest RBI data, and banks’ overseas borrowings would further improve sentiment.

“We need to see how CAD shapes up in the next two quarters. A reduction in CAD was expected but the quantum of fall has been higher than market expectations. From an overall perspective, it seems the CAD numbers of 2.5-3 per cent of GDP for the entire financial year will be achieved. RBI has been able to attract $34 billion and that really changes the whole picture,” said Ramanathan K, executive director & chief investment officer, ING Mutual Fund.

The rupee, after weakening by about 27 per cent against the dollar during the April-August period, has rebounded in the month since then. The currency has appreciated 9.5 per cent since it hit an all-time low of 68.83 per dollar on August 28.

On the services trade front, the net invisibles during July-September 2013-14 improved, essentially reflecting a rise in net services exports. On a year-on-year basis, net services grew 12.5 per cent in the quarter to $18.4 billion, mainly on account of ‘computer services’. Net outflow due to prime income (profit, dividend and interest) was higher, at $6.3 billion, in the quarter, as against $5.6 billion in the same period of 2012-13. The outflows in the first quarter of this financial year had stood at about $4.8 billion. Gross transfer receipts rose 2.6 per cent to $17.3 billion, from $16.9 billion in the September quarter of 2012-13.

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