India’s current account balance has been subject historically to pronounced seasonality – improving sharply in the second half of each fiscal year (October- March). For FY09/10, however, we were surprised that the seasonal impact did not apply – instead, the current-account deficit actually widened for October 2009-March 2010 (to 3.4% of GDP, from 2.2% of GDP for April-September 2009). There were two main factors responsible; the trade balance was broadly unchanged between the two halves of the fiscal year (instead of the sharply declining trade deficit that is typical in the October-March period in other years) and the surplus in net invisibles (services, income and transfers) declined sharply.
The other twin deficit, however, continues its improving trend, evident since December 2009 (seen in the right chart). The 12-month moving average of the fiscal deficit declined from 7.9% of GDP in November 2009 to 6.3% of GDP in May 2010. Consequently, the government’s net market borrowing in the period from 1 April to 10 July (the first trimester of FY10/11) fell by 31.3% YoY.