Current Account Deficit For Q2FY13: Further Deterioration In Situation

A fragile and weak global recovery has been continually denting India’s fiscal position. This is reflected in the recently released RBI data for Q2FY13 on India’s balance of payment situation at the end of September 2012. India’s current account deficit, which mainly reflects the difference between exports and imports has widened by 18% on a yearly basis and stands at 5.4% of the GDP in Q2FY13 as against 4.2% in the same period last year.

The reason for a widening in the deficit to this extent is primarily attributed to a sharp decline in merchandise exports, which declined by 12% on a yearly basis. In the quarter under review, although imports declined by only 5%, a larger decline in exports led to this widening. The immediate impact of the worsening condition is reflected in the movement of the rupee that depreciated after these numbers were out.

Also, the deficit has led to the drawdown of forex reserves this quarter by USD 0.2 billion. This situation has occurred despite the surge in FII inflows and FDI investment.

All this clearly points to the fact that our imports remain sticky and that exports, although aided by a depreciating rupee, are not making much difference in improving the situation. Going forward, we believe that the situation may not improve all that soon as exports continue to be hampered due to weak growth in the global economy. However, if we see a fall in the prices of gold this year, we may see some improvement in the situation. This will be supportive as the net import of gold constitutes anywhere between 1.8-2.4% of the GDP and help de-stressing government financials.

Therefore considering the current situation, we believe that India will once again fail to limit the current account deficit at desired levels.