Analysts at Nomura point out that the India’s current account deficit (CAD) widened to USD15.8bn in Q2, i.e. 2.4% of GDP, from USD13.1bn (1.9% of GDP) in Q1, better than expected (Cons: -USD17.2bn).
Key Quotes
“The worsening comes from a wider merchandise trade deficit, which increased to USD45.7bn in Q2 from USD41.6bn in Q1 owing to sticky imports, particularly oil.”
“However, the wider trade deficit was partly offset by a 17.5% y-o-y rise in remittances, buoyed by a weaker rupee and a moderation in investment income outflows.”
“Importantly, the data highlight that rupee weakness was triggered by a sharp slowdown in net capital inflows to USD5.3bn in Q2 from USD25bn in Q1.”
“Net FDI inflows picked up, but portfolio outflows (more debt, but also equity) and a sharp contraction in short-term trade credit (USD-3.5bn in Q2 from USD4.5bn in Q1), triggered by the RBI’s ban on Letters of Undertaking – were the key culprits behind rupee weakness. As a result, the balance of payments recorded a deficit (of -USD11.3bn).”
“Monthly trade data suggest the current account deficit is likely to widen further to above 3% of GDP in Q3. However, because of the sharp rupee depreciation – both nominal and real – and our expectations of a slowdown in domestic demand, we expect import demand to weaken and the current account balance to improve in H2 FY19 (Oct-Mar).”
“For the full year though we expect the current account deficit to widen to 2.7% of GDP in FY19 (year ending March 2019) versus 1.9% in FY18.”
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