140307 apac, india's balance of payments swings to surplus, hanna luchnikava
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140307 apac, india's balance of payments swings to surplus, hanna luchnikava

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    140307 apac, india's balance of payments swings to surplus, hanna luchnikava 140307 apac, india's balance of payments swings to surplus, hanna luchnikava Document Transcript

    • IHS Global Insight’s Senior Economist Ms. Hanna Luchnikava’s latest note on “India’s Balance of Payments” is given below. Hanna may be reached in the US via email at Hanna.Luchnikava@ihs.com for additional commentary or if you have questions. -0- India's Balance of Payments Swings to Surplus, Guarding Against Future Currency Risks India's current-account deficit narrowed sharply to 0.9% of GDP in the October– December quarter, implying that the full fiscal year 2013/14 deficit may come at or below IHS' current forecast of 2.3% of GDP IHS Global Insight Perspective Significance The current-account deficit shrunk to 0.9% of GDP during October– December 2013, further down from 1.6% of GDP in the previous quarter, largely reflecting the impact of earlier governments' measures to reduce import demand. Implications Given continued weakness in investment demand, imports are expected to remain weak for some time, but the rapid recovery in exports may also decelerate, returning the current-account deficit back to the widening path. Overall, IHS expects the current-account deficit to widen slightly during the fourth fiscal quarter, bringing the full FY 2013/14 deficit to around 2.3% of GDP, while also widening further to around 3.0% of GDP in FY 2014/15. Outlook The sustained current-account deficit should continue to serve as a buffer against adverse foreign-exchange depreciation risks, particularly as the Indian rupee remains vulnerable to the US Federal Reserve's ongoing tapering of its monetary stimulus through 2014. However, the key risk to the rupee will remain from the domestic political uncertainty ahead and during the upcoming general election, due by May 2014. Strong exports growth and sustained weakness in imports demand continue to support current account India's current-account deficit continued to narrow during the October–December 2013 quarter, in line with the government's targets and IHS forecast. The current-account deficit stood at USD4.2 billion, or 0.9% of GDP, during the last quarter of 2013, further down from USD5.2 billion (1.6% of GDP) in the previous quarter and sharply down from
    • USD31.9 billion (6.5% of GDP) in the corresponding quarter of the previous year. The sharp improvement in the trade account was once again behind this rapid improvement. Earlier emergency measures taken by the government and the Reserve Bank of India (RBI) in response to the currency crisis during the summer of 2013 continued to play into the trade dynamics during the quarter, while the impact of weaker currency on trade was also evident. Therefore, merchandise exports increased 7.5% year on year (y/y) to USD79.8 billion in October–December, the third fiscal quarter of the financial year (FY), ending 31 March, up from 3.9% in the corresponding quarter of the previous year, on the back of significant growth in the exports of engineering goods, readymade garments, iron ore, marine products, and chemicals. Although improving demand conditions in India's main trading partners helped accelerate exports growth, the weak Indian rupee also came into play, making Indian goods cheaper for foreign buyers. Meanwhile, merchandise imports continued to decline sharply, falling to USD112.9 billion, down 14.8% from the previous year, against an increase of 10.4% in the third quarter of FY 2012/13. Decline in imports in October–December was primarily led by a steep contraction in gold imports, which amounted to USD3.1 billion as compared to USD17.8 billion in the third quarter of 2012/13 and USD3.9 billion in the second quarter of 2013/14. The official demand for gold was sharply reduced despite the typical seasonal boost attributed to India's autumn festival season after the government raised import tariffs on this precious metal while also imposing some other restrictions on gold-importing companies. However, the evidence from India's neighbouring countries, namely Pakistan and Sri Lanka, suggest that these restrictions resulted in rising cross-border smuggling of gold, not reflected in the official balance-of-payments data.
    • Reinforcing the positive merchandise trade data, India's net services also continued to post positive growth, rising 8.9% y/y to USD18.1 billion, essentially reflecting a decline in services imports. Portfolio investment turns positive as foreign capital returns but FDI inflows unimpressive Recovering from the previous quarter's investors' panic, the capital and financial account also stayed positive on a net basis as foreign direct investment (FDI) and portfolio investment showed net inflows in the October–December quarter. However, the surplus of USD4.8 billion on the capital and financial account was substantially below the USD30.8 billion recorded in the corresponding quarter of the previous year, suggesting India's current-account deficit remains extremely vulnerable to financing risks. Net FDI, which measures inflows of foreign investment after overseas investments by Indian firms are subtracted, stood at USD6.1 billion. Although positive, this was a shortfall from the previous quarter's USD6.5 billion and from more than USD8 billion received in the same quarter of the previous year, largely reflecting investors' concerns over the future of India's economy and business climate following the upcoming election due by April/May. Meanwhile, following sharp portfolio outflows in the first half of FY 2013/14, sparked by fears of the US Fed's tapering of its quantitative easing programme, capital inflows showed some signs of recovery in the October–December quarter. On net, foreign investors increased their exposure to India's asset classes by USD2.4 billion. However, this was exclusively due to the net inflows of USD6.2 billion in equity investment, while the bond market continued to see a net outflow. Net loans availed by the commercial banks was another account that witnessed an outflow during the quarter, amounting to USD5.9 billion, largely on repayments of earlier borrowings as well as a build-up of their own foreign currency assets. On the other hand, the RBI's efforts to mobilise foreign funds by opening special swap schemes for the non-resident Indian (NRI) deposits in September–November resulted in a sharp increase in NRI deposits to USD21.4 billion in the third quarter of FY 2013/14, up from USD2.7 billion in the corresponding quarter of the previous year. Outlook and implications Although the balance-of-payments data was largely within the range of expectations, confirming the ongoing improvement in the current account, the financial component still contained enough reasons for concern. The net capital and financial account, albeit having turned back to surplus, remains extremely thin as compared to the much higher levels seen in recent years that could be considered a safe cushion sufficient to finance
    • the current-account deficit without running into risk of disrupting a healthy foreignexchange reserves accumulation. More importantly, the less volatile, non-debt-creating foreign direct investment inflows remained stagnant, despite the government's efforts to attract foreign capital by raising investment caps in a range of industries from the telecommunications to the financial sector. Net FDI inflows remain at multi-year lows, as investors continue to be unimpressed by the mostly reactive measures of the corruption–plagued Congress-led coalition government and concerns over the future of India's growth following the upcoming election. As a result, the current-account deficit financing has shifted to volatile equity and debt financing and borrowing from abroad. Only in 2009, the net FDI investment in India was nearly double the size of the net portfolio investment while in 2012 the FDI only covered about 80% of portfolio inflows. With imports expected to remain weak for some time, given India's increasingly weak investment demand, the current-account deficit will remain contained, although the recently sharp narrowing of the deficit may soon turn around, as the impact of the weaker currency on exports has already started gradually waning, with merchandise exports growth now running at single digits compared to strong double-digit growth in July–October 2013. All in all, IHS expects the current-account deficit to widen slightly during the fourth fiscal quarter, bringing the full FY 2013/14 deficit to around 2.3% of GDP, while also widening further to around 3.0% of GDP in FY 2014/15. The sustained current-account deficit should continue to serve as a buffer against adverse foreign exchange depreciation risks, particularly as the Indian rupee remains vulnerable to the US Federal Reserve's ongoing tapering of its monetary stimulus through 2014. However, the key risk to the rupee will remain from the domestic political uncertainty ahead and during the upcoming general election. The preliminary polls increasingly suggest victory for the opposition Bharatiya Janata Party and its prime
    • ministerial candidate Narendra Modi, but it would most likely need to build a political alliance with various regional parties to be able to form a coalition government. With India's highly fragmented political landscape, global investors could become increasingly concerned if the next government turns out to be a weak coalition unable to pursue the much-needed structural reforms that could bring India back on its strong growth path. -0-