India’s Jan-March current account deficit narrows as trade deficit contracts

India's current account deficit (CAD) for the fourth quarter of last fiscal (January-March'2015) narrowed sharply to $1.3 billion on the back of contraction in trade deficit, the RBI said on Wednesday. The current account deficit, though lower than the $8.3 billion reported in the previous quarter ended December 31, 2014, was a shade higher than $1.2 billion reported in the same quarter last year.

CAD for Q4 2014-15 declined to just 0.2 per cent of GDP and for the full year it was pegged at 1.3 per cent of GDP. RBI in a statement issued during the second bi-monthly policy review last week estimated the CAD at 1.5 per cent for the current fiscal.

"The reduction in the CAD in Q4 2014-15 was primarily on account of lower trade deficit as net earnings through services and primary income (profit, dividend & interest) witnessed a decline in q-o-q terms albeit secondary income recorded a marginal increase of 0.4 per cent," RBI said.

The merchandise trade deficit ($31.7 billion during Q4 2014-15) contracted sharply on a q-o-q basis on account of a larger decline in imports (13.4 per cent) than in exports (10.4 per cent).

However, the trade deficit widened marginally as exports declined 15.4 per cent in Q4 over the year-ago period as compared to 10.4 per cent decline in imports.

The trade deficit is set to push up in the coming months as oil prices have bounced back from the lows they hit earlier this year. Also with the global economy still in the phase of recovery India is finding it difficult to find buyer for its products which would restrict export growth. The slide in the Indian currency, however, provides a support to exporters.

"During Q4 of 2014-15, on a BoP basis, there was highest ever net accretion of $30.1 billion to India’s foreign exchange reserves in a single quarter; it was more than double the accretion in the preceding quarter and almost four times of the reserves accrued in Q4 of 2013-14 signifying record increase in capital inflows and dip in current account deficit," RBI further added.

Net inflows under the capital and financial account (excluding change in foreign exchange reserves) rose to $89.5 billion during 2014-15 from $48.7 billion in the previous year.

While capital flows have seen a jump over the last year with investors reposing faith in the new government, markets are getting restless with the slow pace of reforms. Government would have to steer through major reforms on land and labour in order to attract capital to the country. With FIIs pulling money out and sluggish recovery of exports FY16 might present a different picture than last year.

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