India Current Account Gap Widest in 4 Years as Fed Looms

(Bloomberg) -- India’s current account deficit widened sharply last quarter, a factor that could pressurize the rupee before an expected reduction in U.S. stimulus in coming months.

Key Points

• The shortfall was $14.3 billion April-June, or 2.4 percent of gross domestic product, the Reserve Bank of India said in a statement in Mumbai on Friday
• That compares with a median $15.4 billion deficit projected in a Bloomberg survey of 15 economists
• The gap is the largest since the June quarter of 2013 and compares with the previous quarter’s $3.4 billion (0.6 percent of GDP) and $0.4 billion in April-June 2016 (0.1 percent of GDP)

Big Picture

India would need to attract bigger inflows to help bridge the wider deficit. However that’s now tougher because the economy is slowing and the Federal Reserve is expected to shrink its balance sheet, the details of which could be announced next week. A smaller U.S. stimulus would curb investment into emerging markets. Many, including India, have already seen global funds buying fewer of their stocks and bonds.

It’s not all bad news though. India’s record foreign-exchange reserves could support the rupee, which has risen more than 6 percent against the dollar this year. More sustainable economic improvement however would need a recovery in exports. Shipments abroad rose about 4 percent in July, the slowest pace this year, while imports grew 15 percent.

Economist Takeaway

“The next quarter will be challenging as the trade deficit has been widening till August," said Madan Sabnavis, chief economist at CARE Ratings Ltd. Support from foreign portfolio investments would be less strong as the flow to debt segment will slow down given that the limits are being reached.”

Details

• Net services receipts increased rose to $18.2 billion, higher than the previous quarter’s $17.6 billion -- and up from the previous year -- mainly due to higher earnings from travel, construction and other business services, the RBI said
• Remittances were at $16.1 billion, up 5.3 percent from the previous year; while net foreign direct investments nearly doubled to $7.2 billion in the April-June quarter from a year ago
• The goods trade deficit widened to $41.2 billion from $29.7 billion the previous quarter and widened from a gap of $23.8 billion in the previous year
• Net portfolio investments recorded a substantial inflow of $12.5 billion, up from $2.1 billion a year ago

--With assistance from Manish Modi

To contact the reporter on this story: Anirban Nag in Mumbai at anag8@bloomberg.net.

To contact the editors responsible for this story: Ruth Pollard at rpollard2@bloomberg.net, Jeanette Rodrigues, Unni Krishnan