External sector slowly weakening again – The Economic Times

Clipped from: https://economictimes.indiatimes.com/news/economy/finance/external-sector-slowly-weakening-again/articleshow/88670363.cmsSynopsis

The current account is back in deficit after a modest surplus last year not only because of a widening trade deficit, but pressures are also being built up due to foreign investors taking huge amounts back home as return on their investments. Though data suggests that we are in a much better position than 2012-13 when the CAD had touched a low of 4.8 percent of GDP.

The external sector is again starting to show its slip. Only IMF‘s SDR support has helped the country maintain a stable balance of payments surplus in the September quarter.

The current account is back in deficit after a modest surplus last year not only because of a widening trade deficit, but pressures are also being built up due to foreign investors taking huge amounts back home as return on their investments. Though data suggests that we are in a much better position than 2012-13 when the CAD had touched a low of 4.8 percent of GDP.

An ET analysis of the latest balance of payments numbers shows that the $17. billion SDR support in August’21 contributed to the stable surplus at $31 billion during the quarter. This despite a current account deficit of despite major components of Capital flows- foreign direct investment and portfolio flows combined- sharply slowing during the quarter at $13.3 compared to $ 31.4 million in the year ago period. ” (Excluding the SDR allocation) would lower the surplus to $13.3bn” said brokerage firm Emkay Global financial services in a report.

BoP

The current account which is sum of countries imports and exports of goods and services ended in a deficit of $9.6 billion in the September quarter not only because of a widening of the trade deficit to $44.4 billion compared to a deficit of $30.7 billion a year ago, but also an increase in net investment income outflow. They repatriated $ 15.8 billion during the July-September quarter compared to $13.6 billion repatriated in the same period a year ago. For the first time the central bank has flagged this factor as a reason for widening the current account deficit.”Net outgo from the primary income account, mainly reflecting net overseas investment income payments, increased sequentially as well as on a y-o-y basis” RBI said.

Even as the external position does not indicate the strength of FY’21, we may still not be as bad as 2013. “Even as the external sector matrix remains favorable, it will be subjected to significant frictions from widening trade deficit amid demand pickup, supply disruptions, and onset of DM policy normalization, and rising Covid cases” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank. “RBI’s forex reserves will remain crucial in stemming rupee’s volatility”.

The current forex reserves of $638bn are further buffered by a net forex forward position of $52bn. India has an 11 month import cover (goods and services) which lends macro stability. “However, as the BoP starts to flatten, the rupee would be at an incremental risk of depreciation fundamentally” said a report by global investment banking firm Jeffries. ” We estimate that at over 2.0% CAD, India’s BoP turns negative. Support for India’s BoP may come from the potential inclusion of India’s sovereign bond in the global indices.”

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