Current Account Deficit Eases But Still Above The Comfort Level

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The Current Account balance may seem to be a complex economic concept. But the current account balance has its significance in the countries that are spending a lot more abroad than they are taking in. At present context in India, the current account has become a major cause of concern as the balance has turned to a deficit.

India's current account deficit (CAD) stands at 3.9% of the GDP in first quarter of 2012-13 as against a record high of 4.5% in the previous quarter (January-March). Current Account deficit means that the country is importing more goods and services than it is exporting. According to the investment newsletter @ http://www.capitaltrends.in/CT/view/PatternMatcher.php CAD numbers for the first quarter, it is clear that the deficit has eased. Thanks to a sharp decline in the imports that reduced the deficit. Goods exports recorded a decline of 2.6% while imports registered a sharper decline of 3.6% during the April-June period of 2012-13.

However, it rose to 3.9% as compared with 3.8% in same quarter of the previous year. Consequently, the CAD at $ 16.4 billion was lower in April-June period ...
... of 2012-13 than the corresponding quarter of the previous year at $ 17.4 billion.

The Reserve Bank of India (RBI) and equity research @ http://www.capitaltrends.in/CT/view/Main.php pointed out that the deficit has reflected the fall in the growth of Gross Domestic Product (GDP) and rupee depreciation of about 17% against US dollar over the corresponding quarter. The CAD (current account deficit) exerted immense pressure on the Indian economy.

Thanks to the government’s measures including hike in import duty against controlling the imports of gold. Imports of oil and gold have significantly moderated during the first quarter. Decline in gold demand and crude oil prices coupled with decelerating growth in emerging and developing economies has favored the trade balance in the first quarter.

RBI also noted that the net inflows under capital and financial account witnessed a decline primarily on account of moderation in foreign direct investment (FDI) inflows and loans by banks and non-banks. There was a net accretion to foreign exchange reserves of $ 0.5 billion during the period. The total foreign exchange reserves witnessed an outflow of $ 5.7 billion in the January-March quarter. It is important that the balance of payments is a surplus of $ 0.5 billion, although it is smaller compared to the year ago balance of payments surplus which rose by $ 5 billion. But the essential fact is that the trend of outflows has started to reverse into some inflows

The trade deficit on Balance of Payment basis amounted to $ 42.5 billion, which was lower than the corresponding quarter of the previous year ($ 44.9 billion). However, as a percentage of GDP, trade deficit widened to 10.0% during the quarter as compared with 9.8% in first quarter of previous year.

Investor Education @ http://www.capitaltrends.in/CT/view/InvestorsEducation.php helps to know that in the current quarter that is July -September there is a huge amount of FII inflows and therefore the balance of payment surplus will definitely be more in the current quarter. The rupee has already reacted to the improved foreign reserves and hence CAD would be looked further as a long term interest, which may bring some significant changes to the present macroeconomic scenario.

Capital Trends is a leading equity research and investment advisory firm. Please visit, http://www.capitaltrends.in/CT/view/Main.php to know more about investment newslette, equity research and investor education .