Q2 current account deficit narrows to 1.6% of GDP

The current account deficit (CAD) narrowed to 1.6 per cent of GDP at $8.2 billion in the second quarter ended September, mainly due to lower trade deficit.

The July-September CAD is lower than $10.9 billion, or 2.2 per cent of GDP, in the same quarter of last fiscal. It is however higher than 1.2 per cent for the previous quarter of current fiscal. “The contraction in CAD was primarily on account of lower trade deficit ($37.4 billion) as compared with $39.7 billion in Q2 of last year though it was higher than the level in the preceding quarter ($34.2 billion),” RBI said in the second quarterly balance of payments data released on Tuesday.

“Although net services receipts moderated marginally on a annual basis largely due to fall in export receipts in transport, insurance and pension services, there has been some improvement over the preceding quarter,” it said. However, it said, after a sharp pick up in the first quarter, net foreign direct investment (FDI) moderated in second quarter of 2015-16. Net FDI inflows during first half of current fiscal rose by more than 10 per cent over the level during the corresponding period of the previous year. During the first 6 months of the current fiscal, the CAD narrowed to 1.4 per cent of GDP from 1.8 per cent in the same period a year ago on contraction in the trade deficit and a marginal improvement in net invisibles.

India s trade deficit narrowed to $71.6 billion in the first half from $74.7 billion in the same period previous fiscal. Last week, the Finance Minister Arun Jaitley had said CAD is expected to be 1.2 per cent of the GDP for the entire 2015-16 fiscal. “With a moderately good GDP growth figure, the fiscal deficit under control, the current account deficit which we planned to about 1.2 per cent, we intend to achieve that,” he had said. It can be noted that a high CAD was one of the reasons for the rupee to get hammered to 69 levels against dollar in August 2013 and became the worst performing emerging market currency following the ‘Fed tantrums’ in the summer of 2013.

According to experts, a CAD up to 2.5 per cent of GDP can be financed with the current level of foreign fund inflows and remittances. In FY14, it had risen to a historic high of 4.8 per cent of GDP.

Reserve Bank said the foreign direct investment also slowed down during the July-September period to $15.1 billion from $16.7 billion in the preceding quarter. On portfolio investments, there was a net outflow of $6.5 billion as against a net inflow of $9.8 billion in the year-ago period. NRI deposits, however, bucked the trend and were up 4 per cent to $6.5 billion in the period under review. Foreign exchange reserves on a balance of payment basis also came down by $0.9 billion in Q2 of the current fiscal.