India's balance of payments (BoP), at USD 17.9 bn, turned further negative for Q3FY09. This is the largest decline in foreign exchange reserves since Q3FY06.
BoP, during Q2FY09, was characterised by:
Significant widening of current account deficit: Current account deficit spiked to USD 14.6 bn in Q3FY09 from USD 12.8 bn in Q2FY09 and USD4.5 bn in Q3FY08. The present current account deficit is the highest since 1990.
1. Trade deficit stood at USD 36.3 bn in Q3FY09, particularly owing to a sharp decline in exports. Exports growth declined ~10% in Q3FY09 against an increase of 33%, Y-o-Y, in the previous quarter.
2. Net invisibles declined marginally to USD 21.7 bn in Q3 (USD 25.7 bn in Q2FY09), driven largely by some slowdown in software earnings (decline of ~10% Q-o-Q) and private transfers (decline of ~20% Q-o-Q). At this level, net invisibles surplus financed ~59% of trade deficit in Q3FY09.
Negative capital account: The capital account, at ~USD 3 bn, turned into deficit for the first time since Q1FY96, particularly owing to larger outflows under portfolio investments, lower FDI flows and ECBs.
1. FDI decelerated significantly during the current quarter, as expected. Net FDI flows stood at USD 0.8 bn in Q3FY09. This is markedly lower than the previous quarter number of USD 5.6 bn. During April-December 2008, FDI was channeled mainly into manufacturing (21.4%), followed by financial services (14.1%) and communication services (12.0%).
2. FII continued to witness net outflows at USD 5.8 bn in Q3FY09, led by large sales of equities by FIIs in the secondary market and slowdown in net inflows under ADRs/GDRs due to drying-up of liquidity in the overseas market. Also, both inflows and outflows reduced sharply during the quarter.
3. ECBs remained muted at USD 3.9 bn during Q3FY09, largely reflecting the increased risk averseness in global markets and elevated cost of borrowings. However, they have risen from the previous quarter's low of USD 1.8 bn.
4. There was some improvement in the inflows under the non-resident Indian (NRI) deposits, partially reflecting the hike in ceiling interest rates on such deposits.
Outlook: Relative improvement in FY10
With deficit in both current and capital account, BoP is set to remain in deficit for FY09 as a whole. However, trade deficit is likely to moderate in FY10, owing largely to softening in import prices. FII outflows will also be smaller in FY10 compared with FY09. Likely trends in earnings from software services and private remittances remain uncertain. On the whole, we expect the BoP position to improve relatively in FY10.
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