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India: Current account deficit widens in Q3 - Nomura

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 24, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Research Team at Nomura, notes that India’s current account deficit (CAD, BPM5) widened to USD8.2bn (1.6% of GDP) in Q3 2015 from USD6.1bn (1.2% of GDP) in Q2, above expectations, owing to the larger trade deficit.

    Key Quotes

    A wider CAD owing to higher imports: The surprise was mainly in imports (as reported by the RBI), which were much higher than the Commerce Ministry estimates, likely reflecting higher defence imports. Both export and import growth contracted at a faster pace in Q3. However, much of the weakness, particularly in imports, was driven by lower commodity prices. Indeed, while overall imports fell 14.4% y-o-y in Q3, imports (ex-oil) actually rose 1%. However, exports (ex-oil) fell 10.7% y-o-y, sharper than the 7.7% contraction in Q2, reflecting slowing external demand. Meanwhile, net invisibles inched higher (1.7% y-o-y in Q3 vs 1.6% in Q2) due to a rise in software services exports and higher investment income inflows.

    Capital inflows moderate sharply, basic balance of payments swings to a deficit: On the capital account, net inflows moderated sharply to USD7.2bn in Q3 from USD18.1bn in Q2, due to a decline in both equity and debt inflows. Portfolio equity outflows (-USD6.1bn in Q3) were driven by concerns about domestic reform momentum (disappointing monsoon session of the parliament) and global factors (slowdown in China). Surprisingly, net FDI inflows also moderated to USD6.6bn in Q3 from USD10.1bn in Q2. Debt flows also moderated owing to portfolio debt outflows (- USD0.5bn), greater repayments on external commercial borrowings (ECB) by Indian corporates and lower NRI deposits inflows. However, short-term trade credit rose with rising imports.

    Overall, the balance of payments swung to a deficit of USD0.9bn from a surplus of USD11.4bn in Q2. Moreover, with lower net FDI inflows and a wider current account deficit, the basic balance of payments (CAD + net FDI) swung to a deficit of USD1.7bn in Q3 from a surplus in the previous two quarters (+USD3.9bn in Q2).

    Outlook still positive: We expect the CAD to narrow to 1.0% of GDP in FY16 (revised up from 0.9% earlier) from 1.3% in FY15, despite weak exports, owing to savings from lower commodity prices. Moreover, we do not see financing as an issue. As growth picks up further in the coming quarters, we expect growth-sensitive flows (FDI, ECB and trade credit) to pick up. We project a balance-of-payments surplus of around USD25bn in FY16.”
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