Lower Q1 CAD good, financiing Q2 CAD is the issue
Though RBI’s strategy of releasing the BoP data a day before its official due date may have played a role in the rupee closing 53 paise above its Wednesday close, the joy is likely to be short-lived. The Q1 current account deficit (CAD) was, in any case, expected to be better for a variety of reasons, though the impact of global liquidity was also significant. The biggest positive, of course, was the surge in exports in Q1—static at around $73-74 billion for 3 quarters from April to December 2012, they jumped to nearly $85 billion in the March 2013 quarter. Combined with a $2 billion sequential fall in imports—gold imports, a part of overall imports, fell roughly this amount as well—this is what accounted for the CAD falling from $31.6 billion in the December quarter to $18.1 billion in the March quarter. Services exports, once the balancing factor when goods exports did badly, continued to languish at around $37-38 billion in the March quarter though software exports rose $1 billion sequentially. Despite this good news, financing of the deficit remained troublesome with global inflows slowing. Though FDI rose by $2 billion sequentially in the March quarter and net FII flows also rose by around this amount, the larger problem is that net flows or what is called the financial account fell from $30.8 billion to $17.6 billion. This was primarily due to a fall of around $8.7 billion in what is called banking capital, or the capital that flows from foreign banks to Indian ones. Add to this a $3.2 billion fall in short term suppliers’ credit thanks to the collapse in Europe, India’s traditional financier of trade credit.
All of this, though, is in the past. What is critical is how the current quarter ending June is going to fare—the fall in the value of the rupee from an average of 54 to the dollar in Q1 to 57 in Q2 suggests the quarter’s CAD will be worse and it is already evident that financing it is not going to be easy. Though the collapse in gold prices has come as a boon, this was more than negated by the sharp surge in gold demand in April and May. According to JP Morgan analysis, the June quarter may see gold imports rising to $18.9 billion from $15.8 billion in Q1. Exports are likely to be $8-10 billion lower based on the April and May numbers while services (based on April data) are not showing any signs of being able to counter the contraction. Thanks to the sharp fall in the value of the rupee, the J-curve effect is beginning to be seen and even once you take into account gold and oil imports, the June quarter import bill is likely to be lower than the March quarter numbers by a few billion dollars. The problem, however, is that with FII outflows of $6.8 billion in the 25 days of June so far, the quarter has seen total outflows of $200 million as compared to inflows of $12.4 billion in the March quarter. In other words, while the June CAD is expected to be higher than the March CAD, financing it is going to be tougher unless the government is able to take some serious action in making India more attractive for FDI flows. The industry minister’s meeting with foreign retailers on Thursday was one opportunity to fix part of this, but so far no meaningful clarifications have been issued to encourage FDI in retail. Another meeting, on raising FDI caps, is scheduled in a few weeks, so it has to be hoped that will yield better results.