Ind-Ra: Foreign Direct Investment Likely to Rise

India Ratings and Research (Ind-Ra) expects the current account deficit (CAD) to come in close to 1.3% of gross domestic product (GDP) in FY16. CAD for 3QFY16 came in at USD7.1bn (1.3% of GDP), sequentially lower than USD8.7bn (1.7% of GDP) in 2QFY16, and also lower than USD7.7bn (1.5% of GDP) in 3QFY15. A lower CAD in 3QFY16 was mainly due to a lower trade deficit of USD34.0bn than USD37.4bn in 2QFY16. Despite a moderation in net invisible receipts, CAD on a cumulative basis narrowed to 1.4% of GDP during April-December 2015 from 1.7% in the corresponding period a year ago. Net invisible receipts moderated to USD26.9bn in 3QFY16 from USD28.7bn in 2QFY16 led by services receipts and private transfers.

Moderation in Services Export: Although net services exports grew 1% and software exports continued to rise on a quarterly basis, net services exports contracted 5.0% yoy in 3QFY16. Net services exports fell to USD53.7bn during April-December 2015 from USD56.5bn over the same period in the previous year. The decline in net services export was largely led by a fall in export receipts in transport and financial services.

Merchandise Export Contracts Further: Merchandise exports contracted for the fifth consecutive quarter, which remains a matter of concern. Merchandise exports contracted 3.9% qoq in 3QFY16 to USD64.9bn. Exports contracted 18.1% yoy during April-December 2015. Ind-Ra believes the export growth will continue to be constrained by the slowdown in growth across countries that will weigh on demand.

Import Contraction led by Lower Gold Demand and Commodity Prices: Overall imports contracted 5.8% qoq in 3QFY16 to USD98.9bn due to lower commodity prices coupled with a sluggish domestic investment demand. Unlike the previous quarter, gold imports contracted 9.6% qoq in 3QFY16 to USD9.03bn as the festival demand ebbed. The import of crude petroleum and its products declined further to USD20.0bn in 3QFY16 from USD23.5bn in the previous quarter. The import of crude petroleum and its products declined sharply by 41.5% yoy during April-December 2015 primarily due to the sharp fall in global crude prices in 2015. With global crude prices bottoming out, Ind-Ra believes the contraction in import of crude petroleum and its products will moderate in the coming quarters.

Remittances Decline in 3Q: Workers' remittances declined to USD8.1bn in 3QFY16 from USD10.3bn in 2QFY16. Remittances by the Indian diaspora have been a stable source of foreign exchange receipts for India and helped the country finance trade deficit in 3Q. Due to the collapse in crude prices, the remittances have suffered largely affected by subdued performances in the Middle East.

Foreign Investment Recovers: Net foreign investment (portfolio and direct) again picked up pace in 3QFY16 and rose to USD10.6bn, after moderating to USD3.2bn in 2QFY16, led by foreign direct investment (FDI). While net foreign direct investment rose to USD10.8bn in 3QFY16 from USD6.6bn 2QFY16, foreign portfolio investments witnessed a marginal net outflow of USD0.2bn in 3QFY16 compared with a net outflow of USD3.5bn in 2QFY16. Equity outflows of USD1.2bn in 3QFY16 were nearly offset by debt inflows of USD1.0bn. Net portfolio investment recorded an outflow of USD3.7bn during April-December 2015 compared to a net inflow of USD28.5bn during April-December 2014. Ind-Ra expects improved performance in FDI to continue as India's economic growth improves gradually in 2016-2017 compared to that in 2015-2016. Ind-Ra believes the focus on 'Make in India' will attract larger and more stable FDIs.

Forex Reserve Increase: The forex reserves increased by USD4.1bn in 3QFY16 mainly because of higher FDI flows under the capital account. The net receipt under the capital account rose to USD10.5.bn in 3QFY16 from USD8.6.bn in 2QFY16. During April-December 2015, there was an accretion of USD14.6bn to forex reserves as compared to USD31.3 billion in April-December 2014.

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