Current account comfort

But that is no reason for complacency

The Reserve Bank of India released the balance of payments (BoP) numbers for the April-June quarter of the current financial year. The overall patterns should come as a source of great comfort. The current account deficit (CAD) for the quarter came in at $6.2 billion, lower than the $7.8 billion of the first quarter of last year. This works out to just 1.2 per cent of gross domestic product or GDP, as compared with 1.6 per cent a year ago. Capital flows were more than adequate to offset this, with accounting accrual to reserves, which essentially represents the BoP surplus, being about $11.4 billion. This is roughly equal to the surplus accruing a year ago. While the overall patterns in the two quarters are broadly similar, there is an important difference.

Last year, the oil and petroleum products trade deficit was $23.6 billion; this year, it had declined to $16.5 billion. The decline is substantial, but since India is a large importer of crude oil and an exporter of refined products, the drastic drop in crude oil prices beginning about a year ago impacted both import and export values. Nevertheless, it has resulted in a substantial net reduction in the deficit. Of course, in the first quarter of last year, crude oil prices were at the $100 per barrel levels, about twice their average levels this year. Herein lies the contrast between the two periods. Last year, the major reason for the relatively comfortable position was the sharp decline in gold imports consequent upon a number of measures implemented by the government and the RBI in 2013. These helped to bring the CAD down from dangerous levels close to five per cent of GDP to a relatively safe zone of below two per cent. This trend has clearly been reinforced by the subsequent decline in oil prices as well as other commodities of which India is an importer.

Will this last? Oil and commodity prices are unlikely to speed back to the peak levels of a couple of years ago. Unfortunately, over the past several months, a steady decline in exports has offset some of this benefit. Still, even in a sluggish export scenario, the world situation clearly works in favour of commodity importers like India. On the capital flows front, however, there are some risks to consider. The Chinese situation has made global markets very volatile, impacting portfolio inflows. The RBI statement points out that these flows were relatively low even in the first quarter, while the Chinese stock market was declining. This scenario may persist. As regards foreign direct investment, while the numbers have been good over the past few months, a significant proportion of the inflows has been in the form of equity stakes into promising e-commerce ventures, which may taper off after the best prospects have been tapped. For now, things look rather comfortable, indicating a high degree of stability for the rupee. But this should not be a reason for complacency.