Preliminary data from the Reserve Bank of India (RBI) released late Monday showed that the Q2 FY2013 (calendar Q3 2012) current account deficit widened from USD 16.4bn to a record USD 22.3bn.As already foreshadowed by the monthly customs trade data, the bulk of the deterioration in the current account position in Q2 stemmed from goods trade. On a balance of payments basis, the goods trade deficit jumped back up to USD 48.3bn from USD 42.3bn, hence more than accounting for the widening in the current account deficit.
Drilling down, the data show that a sharper fall in exports (-12.2% y/y) relative to imports (-4.8% y/y) was the key driver of the bigger deficit.
Capital Inflows Net capital inflows, led by the encouraging buoyancy of FDI inflows but also firmer portfolio inflows, showed a welcome pick up. But, at USD 2.4bn after a USD 1.6bn in Q1, overall net capital inflows. The government’s reform push, launched on 14th September, has thus far reinvigorated portfolio inflows, particularly into the equity markets. These totalled around USD 10.4bn in the 3 months to December versus USD 8.1bn in the previous quarter based on the Securities and Exchange Board of India data.
The monthly merchandise trade data already in hand show the shortfall rising to a new record high, suggesting the Q3 FY2013 data will likely see the current account deficit a touch wider. These deficit figures imply the INR will remain acutely vulnerable to any slowing in the pace of capital inflows.