Net exports of services and lower net outflows on account of profit, dividend and interest, helped the country narrow its current account deficit (CAD) to $8.2 billion (or 1.6 per cent of GDP) in the October-December 2014 period.
CAD, which arises when a country’s total import of goods, services and transfers is greater than exports, in the July-September 2014 period was at $10.1 billion (2 per cent of GDP).
However, on a year-on-year basis, the CAD doubled (from $4.2 billion or 0.9 per cent of GDP in October-December of 2013-14).
A reduction in CAD usually strengthens the domestic currency, making imports cheaper. A stronger currency coupled with cheaper oil (India imports almost 80 per cent of its crude oil requirement) can help keep inflation under check.
A CAD of 2.5 per cent of GDP is considered sustainable and falls within the RBI’s so-called comfort zone.
In the sixth bi-monthly monetary policy statement, the RBI estimated the CAD for 2014-15 at 1.3 per cent of GDP, significantly lower than earlier projections. The RBI’s June 2014 survey of professional forecasters had pegged the CAD at 2.1 per cent of GDP.
Though the merchandise trade deficit widened on a sequential basis in the reporting period, the CAD narrowed primarily on account of net exports of services which picked up sequentially on the back of an improvement in net earnings through travel and software services.
Lower net outflows under primary income due to profit, dividend and interest also helped narrow the CAD.
The merchandise trade deficit in the reporting period widened to $39.2 billion ($38.6 billion in July-September 2014) on account of larger decline in merchandise exports than in merchandise imports.
Aditi Nayar, Senior Economist, ICRA, said the quarter-on-quarter (sequential) decline in the size of current account deficit is a positive surprise.
“A higher services surplus, lower outflows of primary income and smaller net oil imports offset the considerable rise in gold imports between second quarter of FY15 and third quarter of FY15.
“Nevertheless, the decline in merchandise exports remains a concern, particularly given the uncertain growth outlook for key trading partners such as the Euro Zone and Japan,” she said.
Trade deficit narrows India’s trade deficit narrowed to $112.5 billion in April-December 2014 from $116.9 billion in April-December 2013.
Supported by a modest rise in net services receipts, the CAD tracked the trade deficit and shrank to $26.2 billion in April-December 2014 (1.7 per cent of GDP) from $ 31.1 billion in April-December 2013 (2.3 per cent of GDP).
Nayar said a further moderation in the net oil import bill is expected to contribute to a small current account surplus in the ongoing quarter, helping to restrict the current account deficit below $28 billion or 1.4 per cent of GDP in 2014-15.