Gold imports hurt, current account deficit widens to 4.9%.

India’s current account deficit widened to 4.9 percent in the June quarter at $21.8 billion against expectations of $22 billion, but a dramatic slowdown in gold imports and a rebound in merchandise exports are expected to narrow the gap in coming quarters.

Current account deficit stood at 4 percent of GDP at 16.9 billion in the year ago period.

“The trade deficit, coupled with a slow recovery in net invisibles (income and services), led to widening of CAD to $21.8 billion in Q1 of 2013-14 from $16.9 billion in Q1 of 2012-13,” RBI said in its Balance of Payments statement.

CAD had declined to 3.6 per cent in the January-March quarter after touching a record high of 6.5 per cent in the October-December quarter.

The government plans to bring down CAD to 3.7 per cent or $70 billion in the 2013-14 fiscal, from 4.8 per cent or $88.2 billion in 2012-13.

Gold imports increased by $7.3 billion in the first quarter of current fiscal. The imports stood at about 335 tonnes in the April-June quarter.

“Excluding the increase in gold imports of $7.3 billion in Q1 of 2013-14 over the corresponding quarter of the preceding year, CAD would work out to $14.5 billion, which translates into 3.2 per cent of GDP,” the Reserve Bank said.

RBI said there was a small draw down on country’s foreign exchange reserves to finance the CAD. “On BoP basis, there was a slight draw down in foreign exchange reserves of $0.3 billion in Q1 of 2013-14 as against an accretion of $0.5 billion in Q1 of 2012-13,” it said.

During the quarter, while exports declined by 1.5 per cent, imports recorded an increase of 4.7 per cent. The trade deficit widened further to $50.5 billion in Q1 of 2013-14, from $43.8 billion a year ago, it said. The RBI data showed capital account, which includes FDI, portfolio investment and overseas borrowing by companies, had a surplus of $20.8 billion in the June quarter. This was higher than $17.8 billion surplus in the March quarter.

Net foreign direct investment (FDI) surged to $6.5 billion in Q1 of 2013-14, from $3.8 billion in Q1 of 2012-13.

Net portfolio investment registered a marginal outflow of $0.2 billion as compared to outflow of $2.0 billion in Q1 of 2012-13, primarily led by the debt component of FII investment.

“Outflow of portfolio investment occurred essentially from the third week of May 2013 after the US Fed indicated the possible tapering of quantitative easing,” RBI said.

Although the capital inflow was in surplus, higher trade deficit led to a draw down in the forex reserves. India’s forex reserves currently stands at over $270 billion.

Petrol, oil, lubricant import rose to $42 billion in Q1 of current fiscal, from $39.4 billion in the same period last year.

The initiatives taken by the government and the RBI to contain import of gold and encourage flow of foreign funds into the country is likely to ease pressure on CAD in the coming quarters.

High CAD has put pressure on Indian currency, which touched a low of 68.86 to a dollar on August 28. It closed at Rs 62.60 today.

Meanwhile, the data on India’s international investment position showed that net claims of non-residents on India decreased by $12.5 billion over the previous quarter to $296.9 billion as at end-June 2013.

The foreign-owned assets in India decreased by $ 25.7 billion over the previous quarter to $731.5 billion as of June end this year.

A narrowing current account deficit would reduce India’s reliance on foreign money to fund the gap, bolstering the outlook for the troubled rupee.

According to the data released by the Reserve Bank of India, excluding rise in gold imports, first quarter current account deficit would have been $14.5 billion. The data is part of a slew of indicators this week which will offer clues on the health India, which is struggling to recover from the worst slowdown in a decade and running a wide current account gap that was partly to blame for a recent plunge in the rupee.

The rupee has clawed back part of the losses which saw it slump to a record low of 68.85 to the dollar in late August, but few analysts believe Asia’s second-worst performing currency is out of the woods just yet.

“We expect the current account deficit to narrow in 2013/14, given our expectation for a continued improvement in the country’s export cycle,” Credit Suisse said in a Monday note.

The government has unveiled a range of measures including fiscal incentives for its exporters to improve the trade deficit. It has also raised import duty on gold shipments to a record 10 percent, and made airline passengers pay duty on imports of flat-screen televisions.

The measures helped reduce the trade deficit in August to a five-month low of $10.9 billion.

Meanwhile, slowing economic growth has dampened tax revenues, making it tougher for the government to hit its fiscal deficit target of 4.8 percent of GDP for the financial year that ends in March.

During the first four months of this fiscal year the deficit had reached almost 63 percent of the full-year target. Revenues were just about 16 percent of the target, while spending was 31.3 percent of the target.

Economists are now split over whether new RBI chief Raghuram Rajan will hike rates again at the central bank’s next policy review on October 29. Many did not anticipate Rajan’s focus on curbing inflationary pressures despite growth languishing at a decade-low.

Source : firstpost.com