On the face of it, the improvement in the balance of payments data during the second quarter of this year compared to earlier reporting periods looks nothing less than spectacular. According to the RBI, India’s current account deficit (CAD) narrowed sharply to $5.2 billion (1.2 per cent of GDP) in the second quarter from $21 billion (5.0 per cent) during the corresponding period last year. It was also much lower than the 4.9 per cent in the first quarter. The sharp fall is attributed to a contraction in the trade deficit to $33.3 billion from $47.8 billion a year ago. Merchandise exports picked up while imports, especially of gold, moderated. Exports increased by 11.9 per cent to $81.2 billion on the back of significant growth in leather and textile exports. On the other hand merchandise imports at $114.5 billion recorded a steeper decline of 4.8 per cent on a year on year basis. Gold imports fell steeply to $3.9 billion compared to $16.4 billion in the preceding quarter and $11.1 billion a year ago.

Indisputably, some deft policy moves aided by some fortuitous circumstances have made the external economy look much stronger than it was barely three months ago. The gyrations in the rupee-dollar exchange rate say it all. The free fall of the rupee in August was both the cause and the consequence of prevailing macroeconomic uncertainty. It exposed in no uncertain terms the perils of overdependence on short-term capital flows to fund the current account. This is amply reflected in the latest BOP data: net portfolio investment outflows were of the order of $6.6 billion, almost matching the inflows under foreign direct investment. Altogether in the first half of the year, reserves were down by more than $10 billion despite the vast improvement in the CAD. The rupee’s path towards relative stability since then reflects, above all, a considerable improvement in the external economy. The RBI’s unconventional measures to shore up the rupee, such as through opening a separate window for oil companies, have also helped. Exports have received a major fillip in the wake of the rupee’s depreciation. But the narrowing of the CAD is also due to continued weakness in non-gold, non-oil imports. Any acceleration in growth will push up the import bill of these items. Finally, government policies might have sharply curtailed gold imports but the underlying demand for gold remains, and indications are that it will be met through smuggling. The battle for securing the current account on a more permanent basis is far from over.

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