Bop q1fy12

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August 2011

Balance of Payments ReviewOctober 3, 2011

BoP improves in Q1 FY12, but likely to deteriorate due to widening of CAD

Aided by financial account, BoP surplus rises

The current account deficit increased to US$ 14.2 billion in Q1 of FY12

as compared to US$12.0 billion in Q1 of FY11 mainly on the back of

rise in merchandise trade deficit. However, as a percentage of GDP it

remained unchanged at 3.1 per cent in both the quarters.

Underpinned by a strong surge of net capital flows, financial account

surplus widened to US$15.7 billion (3.4% of GDP) in the Q1 of FY12 as

compared to US$13.0 billion (3.5% of GDP) in Q1 of FY11.

As a consequence, overall BoP surplus improved in the Q1 of FY12.

Risk, however, remained as the import cover in terms of forex

reserves has dropped to 7 months from 9.6 months in the last quarter

and 11.2 during the start of the last crisis in September 2008.

Chart 1: Balance of payments account (US$ billion)

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10

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Q1FY11 Q4FY11 Q1FY12

Current Account Financial Account BoP

Chart 2: Trade performance (US$ billion)

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-30

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80

100

120


Exports Imports Trade Balance (RHS)

Overview: As per the latest data1, the current account deficit (CAD) in the first-quarter of FY12 (Q1 of FY12) widened as compared to

the same period last year, mainly on account of rise in merchandise trade deficit. But it was more than offset by the robust capital flows

in the financial account, leading to the overall balance of payments (BoP) surplus rising to US$5.4 billion in the Q1 of FY12, from US$3.7

billion in the Q1 of FY11. However, due to heightened uncertainty in the global scenario, consequent reduction in the financial inflows

and weakening of rupee, the vulnerability of India’s BoP account has increased lately. We expect the current account deficit to widen

further in absolute terms in the remaining quarters of FY12, underpinned by the rise in merchandise trade deficit and moderation in net

services exports.

Source: RBI

Source: RBI

Source: RBI

Merchandise trade deficit widens

One of the important components of current account, merchandise

trade deficit, increased to US$35.4 billion in the Q1 of FY12, with

exports rising by 47.1 per cent on a y-o-y basis to US$ 80.7 billion and

imports rising by 33.2 per cent on a y-o-y basis to US$ 116.1 billion.

Exports driven by rising demand from emerging markets (EMs)

economies and imports due to high oil prices grew at a healthy pace.

However, the heightened global uncertainties lately and weak growth

prospects in both developed and EMs economies are expected to be a

dampener for exports growth, going forward, despite weakening of

rupee. On the other hand, weakness in the rupee is expected to make

imports costlier which will have adverse impact on domestic inflation.

Net services exports increases

Under the new format, instead of invisibles, services have been added

as a separate category. Net services exports increased by 19 per cent

to US$11.9 billion in the Q1 of FY12 as compared to the same period

last year.

Amongst the 12 heads of services, net transport and software services

exports posted an impressive jump on a y-o-y basis in Q1 of FY12.

Investment income under the head primary income continued to

witness net outflows; however net worker remittances remained

stable.

Table 1: Net invisibles

(US$ billion) 1QFY11 4QFY11 1QFY12

(A). Services 10.0 14.4 11.9

- Travel 0.6 1.3 0.1

- Construction -0.2 -0.2 0.0

- Telecom, computer &

Information 12.6 16.6 14.0

(B). Primary Income -2.9 -3.9 -4.3

-Investment Income -2.6 -3.6 -4.2

(C ). Secondary Income 13.1 13.8 13.7

- Personal Transfers 12.7 13.3 13.2

- Workers Remittances 6.4 6.7 6.8

1The first-quarter FY12 BoP data announced by the RBI on September 30

thSeptember 2011 adopted a new accounting format in line with IMF’s Balance of Payments

Manual (Sixth Edition), i.e., BPM6 that divides the BoP under three categories, current, capital and financial account (for details see Annexure below).

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Net FDI Net Portfolio Investment

Source: RBI

Source: RBI

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CAD (US$ bn) CAD (as % of GDP) RHS

Source: RBI

Chart 4: Current account deficit CAD

Net portfolio inflows to moderate due to rising risk averseness

Under the new format, the capital account now includes mainly the

official transfers, which witnessed a net outflow of US$0.27 billion in Q1

of FY12 as against outflows of US$0.1 billion in Q1 of FY11.

In the newly created financial account, net financial flows rose by 20 per

cent on a y-o-y basis in the Q1 of FY12, mainly on account of larger netforeign direct investment (FDI) flows of US$7.2 billion. FDI flows are

expected to remain robust this fiscal on account of healthy

fundamentals of the Indian economy.

Net portfolio flows moderated to US$2.3 billion in the Q1 of FY12 as

against US$3.4 billion in Q1 of FY11, due to rising risk averseness among

foreign investors.

However, due to deepening of the sovereign debt crisis in Europe and

its adverse impact on global financial market, net portfolio flows are

expected to moderate in the remaining months of the current fiscal.

Net debt raised by India Inc. rises in the quarter

As a rising number of Indian corporates tapped the overseas market,

under the debt flows in the financial account, net loans almost doubled

on y-o-y basis in the Q1 of FY11.

Net loans availed by non-government and non-banking sectors (net

external commercial borrowings) stood higher at US$2.9 billion in the

Q1 of FY12, as compared to US$ 2.3 billion in Q1 of FY11.

Monthly data of Q2 of FY12 shows that net external commercial

borrowings (ECBs) has remain robust so far and we expect it to remain

so for the remaining months of this fiscal too due to the rising gap

between the domestic and overseas lending rates.

Outlook for FY12

Current account deficit is expected to settle at around 2.6 per cent of GDP in FY12, unchanged from the previous year’s reading. In

absolute terms, however it is expected to widen from last year.

The upward pressure on CAD this fiscal will mainly come from higher

merchandise trade deficit as we expect sluggishness in exports, but

no let down in oil prices going forward. Also net services exports is

expected to remain under pressure due to weak growth prospects in

US and EU.

Under financial accounts, although net FDI and net ECBs are

expected to remain healthy, net portfolio investments are likely toremain weak for the remaining months of this fiscal.

In case of another recession in US and/or EU, the overall BoP

situation especially the financial account is expected to deteriorate

significantly as net capital inflows will decline sharply.

Table 2: Net debt flows

(US$ billion) 1QFY11 4QFY11 1QFY12

(A). ADRs/GDRs 1.1 0.2 0.3

(B). Currency & Deposits 1.1 2.0 1.2

(C). Loans 7.6 0.4 14.8

- To India 7.6 0.1 14.8

- By India -0.1 0.3 0.0

(D). Trade Credit 4.3 2.7 3.1

( E). Other Accounts -3.8 2.4 -7.7

Other Investment (A+B+C+D+E) 10.3 7.7 11.7

Chart 3: Net capital flows (US$ billion)

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The BoP data released for the first-quarter of FY12 was released in the new format as suggested by theIMF’s Balance of Payments Manual (Sixth Edition), i.e., BPM6. The major changes in the new format withrespect to the old format are presented below:

I. Current Account

Invisibles as a category do not feature in the new format. Services have been put as a separate category, which comprises

of 12 heads. Within services, postal and courier services, which was earlier part of communication services, have been

added to arrive at transportation services.

Income and private transfers have been classified under the heads of ‘primary income’ and ‘secondary income’,

respectively, in line with the BPM6. Accordingly, primary income includes compensation of employees and investment

income from the old format. On the other hand, secondary income in the new format includes only the private transfers

portion, while official transfers is included as part of the rechristened capital account.

Mercanting which was part of services earlier has been added to goods as net exports of goods under merchanting.

II. Capital Account

Existing capital account has been bifurcated under two heads as ‘capital account’ and ‘financial account’ in the new format.

Accordingly, the rechristened capital account in the new format includes official transfer part of current account and

purchase/sale of intangible assets like patents, copyrights, trademarks etc. portion of the capital account of the old format.

III. Financial Account

Within financial account, a new category of ‘other investments’ has been formed, which includes loans, banking capital,

other capital and Rupee debt service categories from the old format.

Funds raised by the Indian corporates through ADRs/GDRs which was part of portfolio investment in the old format has

been classified under ‘other investments’.

Short-term credit to India has been removed from loans and renamed as ‘trade credit and advances’ which comes under

‘other investment’.

Banking capital in the old format has been classified into three p arts under the new format under ‘other investment’ - (i).

NRI deposits has been named as 'currency and deposits' of 'deposit taking corporations, except the central bank'. (ii).

Movements in Nostro/Vostro balances have been classified as 'loans to deposit taking corporations' (iii). 'Others' of

banking capital in the old format has been included as currency and deposits of central banks.

External Commercial Borrowings to/by India have been reclassified as Loan to/by other sectors.

External assistance to/by India has been reclassified as loans to/by general government.

Annexure: Correspondence between Old and New Formats of BoP

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Analytical Contacts:

Sunil Sinha Parul Bhardwaj

Head, Senior Economist Economist

Email : [email protected] Email : [email protected] Ph : +91-11-42505120 Ph : +91-11-42505138

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