Current Account Deficit Widens To 6.7%

India’s Current Account Deficit (CAD) widened to USD 32.63 billion in the quarter ending December 2012. This marks a rise of 61%, when compared to the CAD of USD 20.2 billion seen in the quarter ending December 2011. As a percentage of GDP, the CAD has touched a new high of 6.7% in Q3FY13. This figure was 4.4% in Q3FY12 and 5.4% in Q2FY13.

On a BoP basis, merchandise exports showed a flat growth (0.5% YoY), when compared to the 7.6% growth seen in Q3FY12. On the contrary, imports saw a steep incline of 9.4%, mainly contributed to by imports of oil and gold. This resulted in a trade deficit that widened to USD 59.6 billion in Q3FY13 from USD 48.6 billion in Q3FY12.

Although there has been a surge in the CAD, an equivalent rise in capital inflows has helped the CAD to be fully financed. This pick up in inflows resulted out of a rise in foreign portfolio investments which increased to USD 8.6 billion in Q3FY13 from USD 1.8 billion in Q3FY12. While loans availed by banks and the corporate sector amounted to USD 7.1 billion, net Foreign Direct Investment (FDI) declined to USD 2.5 billion in Q3FY13. On a BoP basis, there was an accretion to the foreign exchange reserve by USD 0.8 billion during Q3FY13.

In the period April – December 2012, the CAD stood at USD 71.7 billion as against USD 56.5 billion in the corresponding period in the previous year. This can be translated to 5.4% of the GDP in the period under review as compared to 4.1% of the GDP in the same period in the previous year. This situation has occurred even with a rise in inflows from FIIs, non-resident deposits and short term credits, thanks to a ballooning oil and gold bill.

This figure of 6.7% is certainly daunting, especially with the CAD being closely watched as it captured prime focus pre and post budget. This sudden surge is likely to result in increased pessimism towards the measures taken to work on reduction in the deficit. The targets look ambitious but the road to recovery doesn’t seem all that smooth. A negative reaction to this event is likely to be seen in the markets on Monday morning.