India's current account deficit narrows to $1.4 bn in December quarter

The CAD is a critical indicator of the macroeconomic health and represents the gap between the overall foreign exchange expended and received in the economy.

The country's current account deficit (CAD) narrowed sharply to $1.4 billion, or 0.2 per cent of GDP, for the December 2019 quarter, the Reserve Bank of India (RBI) said on Thursday. The deficit had stood at 2.7 per cent in the corresponding quarter a year ago and 0.9 per cent in the previous quarter.

The sharp contraction in the deficit was mainly due to a lower trade deficit of $34.6 billion, and a rise in net services receipts, the central bank said.

The CAD, a critical indicator of the macroeconomic health, represents the gap between the overall foreign exchange expended and received in the economy. The release of the data, coming at a time when markets are spooked due to the coronavirus concerns, will help provide hope to investors.

The foreign exchange market tracks the gap closely, and the release of the data comes on a day when the rupee depreciated to a 17-month low of 74.24 against the dollar. During the 'taper tantrum' episode of 2013, the CAD at record highs was one of the reasons for the rupee to be hammered.

For the first nine months of the financial year, the CAD has narrowed to 1 per cent, the RBI said.

During the December 2019 quarter, the trade deficit narrowed to $34.6 billion as against $49.3 billion for the same period a year ago, the RBI data said adding that the dip was largely driven by a correction in imports.

The Indian economic growth may slow to a decadal low of 5 per cent for the financial year 2019-20, driven largely by consumption, which seems to have impacted the imports as well.

On the services front, the net earnings increased to $21.9 billion, which was marginally higher as compared to the $21.7 billion in the year-ago period. The RBI said the receipts increased on the back of a rise in net earnings from computer, travel and financial services.

In what can be seen as a surge in remittances by the diaspora, the private transfer receipts rose 9 per cent to $20.6 billion for the quarter, the RBI said. The net foreign direct investment was also higher at $10 billion in the December 2019 quarter, as against $7.3 billion in the year-ago period.

Foreign portfolio investments recorded a net inflow of $7.8 billion as against an outflow of $2.1 billion last year on account of net purchases in both the debt and equity market, it said.

The external commercial borrowings by Indian companies increased to $3.2 billion for the quarter, up from the $2 billion in the year-ago period, the RBI said.

There was an accretion of $21.6 billion to the foreign exchange reserves on a balance of payment basis as against a depletion of $4.3 billion in the third quarter, the RBI said.