Current account deficit in Q4 balloons as imports rise

India’s current account deficit rose significantly in the quarter ended March 31 to $13 billion compared with $1.2 billion in the year earlier quarter as growth in imports outpaced the rise in exports and growth in invisibles slowed.

Reflecting the downturn in the global trade the gap between exports and imports during the quarter grew to $31.5 billion compared to $ 20.2 billion in the year-ago period.

Invisible receipts grew 15.4 per cent during the last quarter after declining for four consecutive quarters, the Reserve Bank Of India (RBI) said. Invisible receipts fell 18.3 in the fourth quarter of year to March 2009 led by services and private transfers. Receipts of private transfers rose 33 per cent, compared with a decline of 31 per cent, the RBI said in a statement.

Increasing deficit may put pressure on the rupee, which fell 3.3 per cent in the quarter ended June 30 and was the second worst performer in Asia after the Korean won. The rupee gained 3.5 paise to Rs 46.45 to a dollar.

The rupee is likely to trade in a range of 44 to 47 per dollar as though imports are rising and invisibles not growing as fast as before the financial crisis of 2008, capital inflows and higher interest rates and strong economic fundamentals in India would attract inflows, Rupa Rege-Nitsure, chief economist at Bank of Baroda said.

Investment income receipts fell 23.5 per cent during the quarter mainly due to persistence of lower interest rates abroad, it said. Invisibles payments grew 34 per cent growth in January-March, compared with a decline of 21 per cent a year ago mainly due to higher payments for transportation, business and financial services and under investment income.

For the year ended March 2010, the current account deficit was higher at $38.4 billion or about 2.9 per cent of the GDP as compared with $28.7 billion or 2.4 per cent of GDP in the year ended March 2009. RBI attributed the rise in deficit to mainly lower net invisibles surplus.

The growth in invisible payments was higher than the growth in receipts. This led to 2.6 per cent decline in net invisibles (invisibles receipts minus invisibles payments) to $18.5 billion in the January-March 2010 quarter. The decline, however, was lower as compared Q4 2008-09, when it fell by 15.8 per cent to $19 billion. Net invisibles for 2009-10 declined to $78.9 billion from $89.9 billion a year ago.

In contrast to widening deficit on the current account, the capital account saw an improvement in Q4 of 2009-10. The surplus in capital account was $15.1 billion as against just $1.5 billion in same quarter last year. The surplus in the capital account increased mainly due to portfolio investment and short-term trade credits.

The surplus in the capital account increased sharply to $53.6 billion (4.1 per cent of GDP) during the year from $7.3 billion (0.6 per cent of GDP) a year ago. As the surplus in the capital account exceeded the current account deficit, there was a net accretion to foreign exchange reserves of $13.4 billion during 2009-10. In 2008-09 there was a drawdown of reserves of $20.1 billion.

Net FDI flows were unchanged at $3.2 billion during the quarter. Net inward FDI stood at $5.1 billion during the quarter, compared with $8 billion in the year ago period. Net outward FDI fell to $1.9 billion compared with $4.8 billion.