India’s Current Account Deficit is at -1.6% of GDP as it comes in at -8.2 Billion Dollars for the quarter ended in September. This has been a rising number in the last three quarters, both as a % of GDP and in absolute terms. However at -1.6% it’s not a big worry.
How has the CAD come about?
The Current account is basically four parts:
Goods (stuff we import and export in physical form)
Services (mostly software exports for India, but also includes things we import like amazon web services etc.)
Income (Income from dividends or interest on our investments abroad, or other people’s investments in India) – this is negative since we have borrowed from abroad and foreign participants have invested here and take out their dividends or interest.
Personal transfers: Typically, remittances from abroad.
As you can see, we got nearly $16 billion in remittances, and about $18 billion dollars in services that rescued us – but otherwise, we have seen a massive $37 billion hole in our goods imports (which used to be mostly crude and gold) that has changed things.
The Current Account is always balanced by the rest of the elements in the Balance of Payments (BoP). The rest are the Capital and the Financial Account, and we have highlighted some of the pieces here:
The Current Account Deficit was made up by:
Foreign Direct Investment of $8.2 bn
Foreign Portfolio Investors took out $6.5 billion in the Sep quarter, which was a negative
NRI’s Deposited $4.2 bn with us
We borrowed $1.7 bn from abroad
We lost reserves of $856 million (this is a positive in the BoP, but a negative in the reserves account)
Our View: CAD Is Not Much, But Worry Is That Flows Slow
In absolute terms the CAD at $8 billion is not a big problem. At this level, there is no major fear right now. (It used to be $100 billion a year, now it’s $30 billion).
With crude at lows and gold imports not that high, though, we should be worried about a few things:
The FDI we get is usually much higher and adds to the FPI investments. This time both FDI and FPI have been lower, and FPI is actually negative.
We saw only a $856 m hit to reserves this time due to NRI deposits – but will the crude fall in the middle east crimp their deposits going forward?
We are not going to be current account “positive” in the near term so we have to keep our eyes on fund flows. Otherwise, the RBI will have to dig into reserves next year or the rupee will fall like crazy.
In the September quarter the rupee fell nearly 8% from 63 to 66, as the RBI refused to sell reserves as much as they should have. Should that fear continue, the rupee will be in the 70s soon unless we suddenly become really attractive to foreigners as an investment destination.