Shadow of widening current account deficit

As expected, the current account deficit (CAD) widened to 2.2 per cent of GDP in the December quarter. Stronger portfolio flows helped to keep the overall balance of payments surplus largely steady. The current account deficit is expected to stay within the central bank’s comfort zone over the forecast horizon.

The CAD widened in the December quarter to 2.2 per cent of GDP from 1.2 per cent of GDP in September

The key driver in the quarter was the wider merchandise trade deficit, although the improvement in the services trade surplus provided a partial offset. The capital account surplus increased to 3.6 per cent of GDP from 2.7 per cent of GDP in the previous quarter

This was driven by higher portfolio flows, loan and banking capital, although FDI flows weakened.

Consequently, the overall balance of payments surplus remained largely steady

It tracked at 1.5 per cent of GDP 1.6 per cent of GDP in the September 2017 quarter. Consistent with the largely steady BoP surplus in the quarter, FX reserves recorded an accretion of $9.4bn as compared to $9.5bn in the preceding quarter.

 

CAD to remain within comfort range

On a quarterly basis, the current account deficit is expected to narrow to about 1.1 per cent of GDP in the March quarter, driven largely by a lower trade deficit. Per customs data, the goods trade deficit had already narrowed to 6.6 per cent of GDP in February as compared to 7 per cent of GDP in the December quarter on a three-month annualised basis. Over the forecast horizon, the current account deficit is expected to stay broadly within the central bank’s comfort zone and to be sufficiently funded.

 

Current account deficit widened

The goods trade deficit widened in the December quarter

It reached 7.1 per cent of GDP 5.5 per cent of GDP in September. This trend was largely because of stronger growth in imports owing to higher oil prices and strength in domestic demand leading to strong non-commodity imports.

Exports: Growth remained broadly steady at 12.8 per cent year-on-year (YoY) from 12.9 per cent YoY in the September quarter, suggesting that external demand conditions continued to remain conducive.

Imports: Growth rose to 19.2 per cent YoY from 17 per cent YoY previously.

 

Net invisibles growth picked up for the fourth quarter

Growth expanded to 21 per cent YoY from 15.4 per cent YoY previously. The acceleration stemmed from higher growth both in net services receipts and net transfers.

Net services exports improved: They rose 17.8 per cent YoY from 12.7 per cent YoY previously, led by a rise in net earnings from software services and travel receipts. Software services remained in positive growth territory for the second quarter, growing 3.5 per cent YoY as compared to 1.8 per cent YoY in the previous quarter.

Net private transfer receipts (remittances from non-residents) accelerated, reaching a 23-quarter high: They grew 15.5 per cent YoY in the quarter versus 12.3 per cent YoY in the last quarter. As a percentage of GDP, private transfers remained steady at 2.6 per cent.

 

BoP surplus remained largely steady

Capital account surplus rose

Capital account surplus as a percentage of GDP accelerated to 3.6 per cent in the December quarter from 2.7 per cent last quarter. In US dollar terms, it tracked at $22.1bn from US$16.4bn previously. The sequentially higher capital account surplus was largely led by stronger portfolio flows, loans and banking capital in the quarter.

FDI flows: Net FDI inflows decreased to 0.7 per cent of GDP from 2.1 per cent of GDP in the September quarter.

FII flows: The net FII portfolio account recorded strong inflows of $5.3bn in the December quarter vs $2.1bn in the September quarter, reflecting net purchases in both the debt and equity markets.

Overall balance of payments (BoP) surplus remained broadly steady. It was 1.5 per cent of GDP versus 1.6 per cent of GDP in September.

Source: Morgan Stanley Research