India Reports Record High Current Account Surplus Amid Demand Drop
A bird flies over boats as gantry cranes stand at the Jawaharlal Nehru Port, operated by Jawaharlal Nehru Port Trust (JNPT), in Navi Mumbai, Maharashtra, India, on Monday, March 30, 2020. Photographer: Dhiraj Singh/Bloomberg

India Reports Record High Current Account Surplus Amid Demand Drop

India saw a record high current account surplus — a rarity for the economy — in the April-June quarter as a precipitous drop in local demand led to sharper fall in imports compared to exports. The quarter also saw net portfolio and foreign direct investment flows slow to a trickle, while remittances from foreign workers fell.

Balance of payments data released by the RBI showed:

  • India’s current account balance recorded a surplus of $19.8 billion in the April- June 2020 quarter, compared to a surplus of $0.6 billion in the preceding quarter.
  • As a percentage of the GDP, current account balance rose 3.9% in the April- June 2020 quarter, compared to 0.1% in the preceding quarter.
  • Forex reserves saw an accretion of $19.8 billion in BoP terms during the quarter as compared to $14 billion in the previous quarter.

This is the second consecutive quarter that the economy has seen a current account surplus. It is also the highest on record.

Among key components, private transfers fell as expected

  • Private transfer receipts, mainly remittances, fell 8.7% in the April- June 2020 quarter from a year ago.
  • Net FDI recorded outflow of $0.4 billion in the April- June 2020 quarter vs an inflow of $14 billion a year ago.
  • Net portfolio investment was at $0.6 billion compared to $4.8 billion a year ago.
  • With repayments exceeding fresh disbursals, external commercial borrowings also saw a net outflow of $1.1 billion in Q1 as against an inflow of $ 6.0 billion a year ago.
The current account surplus in Q1 FY21 was well above our expectations, as the fall in remittances was remarkably muted, despite the adverse economic conditions globally amid the ongoing pandemic. With the domestic and global lockdowns to fight Covid-19 exuding a differentiated impact on exports and imports, the merchandise trade deficit shrunk to just $10.0 billion in Q1 FY21, most of which was accounted for by the net oil balance.
Aditi Nayar, Principal Economist, ICRA

Neelkanth Mishra of Credit Suisse pointed out that high current account surplus was expected given the low trade deficit of just $10 billion. Capital flows, meanwhile, were near zero, a trend seen before only during the global financial crisis and the taper tantrum of 2013.

“The $17 billion quarter on quarter and $28 billion year-on-year decline in capital flows was broad-based: gross FDI was strong at $11 bn, but so was FDI repatriation, resulting in near-zero net FDI. NRI deposits kept coming (+$3 billion) but foreign loans saw $1.6 billion of outflows ($5-6 bn of inflows/quarter last year). Weak net FPI inflows were known,” Mishra wrote in a note.

Credit Suisse expects the current account surplus to shrink, but a deficit is unlikely.

Implication Of Current Account Surplus

The temporary shift from a current account deficit economy to one with a current account surplus could be two-fold.

First, the surplus has allowed the Reserve Bank of India to build its stockpile of forex reserves. As of September 25, forex reserves stood at $545 billion, as the central bank has chosen to mop up foreign exchange flows from the market. In a report ahead of the data release, IDFC First Bank said they expect forex reserves to at around $570-575 billion by the end of the year. This is based on the expectation that India will report a current account surplus for the full financial year as well.

As the RBI absorbs dollars, it has continued to supply rupee liquidity to the market. This, in turn, may suggest that there is a wider pool of local savings that could support an increased borrowing programme from the government. “Given the current account surplus, there are more savings in the economy than we think. So, India may be able to absorb a higher level of borrowing that most believe,” said Sajjid Chinoy, chief India economist at JPMorgan in a recent interview with BloombergQuint.

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