March 2015
CRISIL Economy First Cut
BOP: CAD widens from a year ago, but reserves continue to build-up
Indias current account deficit (CAD) narrowed to $8.2 billion (1.6% of GDP) in Q3, fiscal 2015 from $10.1 billion (2.0% of GDP) in
Q2. Compared to a year ago however, CAD doubled (from $4.2 billion) due to a rise in goods imports (4.7% y-o-y) coupled with a
decline in goods exports (-1% y-o-y). Consequently merchandise trade deficit widened sharply to $39.2 billion from $33.1 billion a
year ago. However, a rise in net services exports to $$20.3 billion in Q3, fiscal 2015 vis--vis $18.1 billion a year ago, provided
some cushion to the CAD. Capital flows at $23.4 billion (up from $18.7 billion last quarter), were more than sufficient to finance the
CAD and resulted in an accretion of $13.2 billion to Indias foreign exchange reserves. Reserve build-up in Q3 was significantly
higher than $6.9 billion in the previous quarter.
The widening of trade deficit was entirely driven by a sharp worsening of Indias non-oil trade deficit (Figure 1) as non-oil
imports have been rising on the back domestic recovery while non-oil exports continue to languish due to weak global demand.
Further, a sharp appreciation in Indias real effective exchange rate by 7.8% y-o-y (6-currency trade weighted REER: 106.7 in
Q3 fiscal 2015 vis--vis 99 in Q3 fiscal 2014) may also have contributed to reduced competiveness of Indias exports and a rise
in non-oil non-gold imports. The non-oil trade balance trebled from a year ago to $19.0 billion.
In contrast, the oil trade deficit (oil exports-oil imports) narrowed by nearly $7 billion (Figure 1) as sharp decline in oil prices
lowered Indias oil imports bill, which alone account for 1/3 of Indias total goods imports. Oil prices (Brent) averaged to
$76.4/barrel in October-December 2014 compared to $109.2/barrel in the same period a year ago. Lower oil prices also
reduced realisations on petroleum product exports, which fell by 9.1% y-o-y in Q3 to $14 billion. On the balance, as stated in
the Economic Survey, a $10 reduction in the oil prices helps improve Indias CAD by $9.4 billion.
While capital flows were unchanged from a year ago in quantum terms, the quality of capital flows improved - notwithstanding the
inward flows under the NRI deposit scheme in Q3, last fiscal year. Longer-term and less volatile capital flows such as foreign direct
investments (FDI) and loans availed by banks increased significantly (Figure 2).
Net FDI flows also increased to $7.4 billion from 6.0 billion a year ago. Measures taken by the government to improve the ease
of doing business and Indias improving growth-inflation mix is likely to continue this momentum going forward. The largest
increase was witnessed in loans availed by banks, which increased to $6.6 billion in Q3, fiscal 2015 as compared to an outflow
of $5.9 billion a year ago, mainly due to inward repatriation of assets held abroad by banks. External commercial borrowings (to
India) by Indian companies however declined to $1.4 billion from $4.1 billion a year ago.
Within short-term flows, FII inflows rose to $6.1 billion from $2.5 billion a year ago due to a sharp increase in debt inflows over
the past few months as continuing disinflation built-up expectations of monetary easing. Trade credit and advances witnessed
net outflows of $1.3 billion during October-December 2014 due to large repayments. Lower oil imports and only a gradual
recovery in domestic demand is likely to have contributed in keeping inflows on this account muted.
CRISIL Economy First Cut - BOP
Outlook: We expect CAD to be in surplus during January-March 2015. For 2015-16, we forecast Indias current account deficit to
remain contained at 1.1% of GDP. While core (non-oil non-gold) imports will pick-up with higher domestic GDP growth, lower oil
prices (CRISIL forecast $60-65/barrel in 2015-16 vis--vis $85/barrel in 2014-15) will keep the CAD in check. Export growth
however, is expected to remain muted due to weak economic outlook for Indias major export markets such as the OPEC
economies, China and [Link] the same time, likely monetary policy normalisation by the US Fed later this year may result in
volatility in portfolio flows in H2, 2015-16. It is therefore, critical for India to continue to improve its macroeconomic outlook (low
CAD, continuing disinflation, fiscal consolidation, and improving growth) and reduce its external vulnerability.
Figure 1: Trade balance (US$ billion): Oil vs Non-oil
Oil balance
Q3FY14
Q3FY15
Non-Oil balance
Q3FY14
Figure 2: Increase in longer-term inflows (excl. NRI
deposits)
US$ billion
Q3FY15
25.0
20.0
15.0
-6.4
10.0
5.0
-20.2
-19.0
0.0
Q3FY14
-26.8
Q3FY15
Short-term
Q3FY14
Q3FY15
Q3FY14
Long-term excl NRI
deposits
Note: Short-term: FII + trade credit; Long-term: FDI+ECB+loans by banks
Source: Reserve Bank of India
Analytical Contacts:
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Neha Duggar Saraf
Chief Economist, CRISIL Research
Economist, CRISIL Research
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Email:[Link]@[Link]
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Jyoti Parmar
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Phone: +91 22 3342 1835
Q3FY15
NRI deposits
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