A stronger rupee, in addition to gold imports before the Goods and Services Tax regime kicked in, has led to a sharp widening of the current account deficit (CAD) to $14.3 billion in the April-June period, which was 2.4% of the GDP. In the year earlier period, the CAD was $0.4 billion, which was 0.1% of GDP.
The current account deficit was $3.4 billion or 0.6% of GDP, in the January-March period. According to latest data released by the Reserve Bank of India, the widening of the CAD on a year-on-year basis was primarily on account of a higher trade deficit ($41.2 billion) brought about by a larger increase in merchandise imports relative to exports.
According to Aditi Nayar, principal economist, ICRA, the rise in CAD was due to a spike in gold imports before the GST kicked in from July 1.
‘Spike in gold imports’
The sharp surge in the CAD “comes as no surprise, with the spike in gold imports prior to the introduction of GST responsible for half of this uptick,” Ms. Nayar wrote in a note. The stronger rupee, one of the best-performing Asian currencies in 2017, had encouraged imports.
“The lagged impact of the rupee appreciation was partly responsible for a faster rise in non-oil non-gold imports relative to exports, bloating the” goods trade deficit, she wrote.
RBI data shows the net foreign direct investment which was at $ 7.2 billion in Q1 of 2017-18 almost doubled from its level in Q1 of 2016-17, the data showed. Net portfolio investment recorded substantial inflow of US$ 12.5 billion in Q1 of 2017-18, primarily in the debt segment, as compared with $ 2.1 billion in Q1 of last year.
Net services receipts increased by 15.7% on a y-o-y basis mainly on the back of a rise in net earnings from travel, construction and other business services. Private transfer receipts, mainly representing remittances by Indians employed overseas, at $16.1 billion increased by 5.3% over the corresponding quarter of previous year, RBI said.
Net receipts on account of non-resident deposits, however, was lower, at $ 1.2 billion in Q1 of 2017-18 as compared to $1.4 billion a year ago.
“In Q1 of 2017-18, there was an accretion of $11.4 billion to the foreign exchange reserves (on BoP basis) as compared with US$ 7.0 billion in Q1 of 2016-17 and US$ 7.3 billion in the preceding quarter,” the RBI said.
ICRA expects the the current account deficit to double to around US$30-32 billion (1.2-1.3% of GDP) in 2017-18. “Nevertheless, this should be adequately financed through a resumption in NRI deposits, as well as healthy FDI and FII inflows,” the note added.
