Current account deficit widens

The Reserve Bank of India (RBI) on Friday said the foreign exchange reserves (on a balance of payments basis, that is, excluding valuation effects) increased by $5.70 billion during April-September 2011-12 as compared with an increase of $7 billion in the same period previous year.

The foreign exchange reserves (including the valuation effects) increased by $6.70 billion during period under reference as against an increase of $13.80 billion in the same period a year ago.

The valuation gains, reflecting the depreciation of the U.S. dollar against major currencies, amounted to $900 million during April-September 2011 as compared with valuation gain of $6.8 billion during the same period last year. Accordingly, the RBI said that valuation gains accounted for 13.4 per cent of the total increase in foreign exchange reserves during the six month period.

On a balance of payments (BoP) basis, merchandise exports recorded a growth of 47.2 per cent (year-on-year) during second quarter of 2011-12 as against an increase of 20.1 per cent during the corresponding quarter of 2010-11.  Similarly, on a BoP basis, imports registered a growth of 35.4 per cent (year-on-year) during the quarter as against an increase of 21.9 per cent during same quarter last year.

Despite higher growth in exports relative to imports, the trade deficit widened to $43.9 billion as compared to $37 billion during corresponding quarter last year, the RBI said.

Services receipts recorded a growth of 9.3 per cent (year-on-year), led by software, travel and transportation. Services payments, however, declined by 3.9 per cent to $18.50 billion during the quarter from $19.20 billion in corresponding quarter of last year.

While net secondary income (private transfers) receipts remained buoyant at $16.20 billion, primary income account (investment income) continued to show a net outflow.

Consequently, the current account deficit (CAD) was $16.90 billion in the second quarter of 2011-12.

The financial account surplus moderated in the second quarter of 2011-12 primarily on account of outflow of portfolio investment. “There was, thus, a negligible accretion to foreign exchange reserves ($300 billion) during second quarter of 2011-12 (excluding valuation),” the RBI said.

During April-September 2011, the current account deficit widened to $32.7 billion, largely reflecting the higher trade deficit. The financial account surplus improved mainly on account of buoyancy in FDI inflows and loans. “Despite improvement in the financial account surplus, accretion to reserves during April-September 2011 was lower mainly due to the widening of the CAD as compared to April-September 2010.”

Financial account

The net inflows under the financial account were lower during the second quarter of 2011-12 mainly on account of FII outflows. With lower equity inflows, there has been distinct shift towards debt flows which financed significant part of CAD during second quarter of 2011-12.

Net financial inflows moderated at $17.9 billion during the second quarter of 2011-12 ($18.30 billion during the second quarter in the previous year).

Net FDI inflows to India (inward FDI minus outward FDI), however, increased to $4.40 billion in the second quarter as compared to $3.6 billion.