September CAD may well turn out to be zero
Though other data such as commercial vehicle sales or even the PMI suggest the economy hasn’t quite bottomed out yet, trade data suggest the bottoming out in evidence for a few quarters has strengthened and the September quarter could well be a zero current account deficit (CAD) one, or perhaps negative by just a few billion dollars, a far cry from the average quarterly $22 billion CAD in FY13. If the September CAD is in the balance, this means FY14’s first half deficit will be $22 billion—even assuming a surge in imports, particularly of gold now that the festive season has begun, it seems unlikely FY14’s CAD will be more than $50-$55 billion.
With exports continuing to grow at double-digit rates for the third month running—for the 12 months before this, exports either contracted or were sluggish—the September quarter’s trade deficit was under $30 billion as compared to $50 billion in the June 2013 quarter, $45.6 billion in the March quarter and $58.4 billion in the December 2012 quarter. While exports continued to surge, the sluggish economy meant imports continued to contract, but the biggest contraction was really in gold imports. Gold imports fell from $16.5 billion in Q1FY14 to a mere $3.5 billion in Q2FY14, largely due to lack of clarity on gold import policy. The resolution of the Syria crisis meant oil prices softened a bit more, and that led to a billion dollar saving on oil imports in the September quarter. While services data is not out for August and September, based on past trends, this is likely to have yielded $18-19 billion for the quarter; a similar amount would have come in by way of remittances and around $4-5 billion would have been the likely outflow on account of other incomes—in other words, the September CAD is likely to be balanced.
With the current account deficit for FY14 likely to be around $50-55 billion, that’s around $35 billion less of forex that needs to be financed—FY13 CAD was $88 billion. If the rupee continued to fall despite this, it was because of the dollar’s strengthening against most currencies, the market not taking into account a rapidly improving CAD as well as an over-reaction to the likely Fed taper and the resulting FII outflows of $7.1 billion in June, $3.1 billion in July and $2.3 billion in August—FII flows were a positive $700 million in September. Though it is early days yet and a lot can still go wrong if foreign investors take fright again, the worst seems to be over. For one, the taper could well be on hold for another 6 months as a result of the impact of the US shutdown. It also helps that while around $6 billion has already come in through the swap facilities for NRIs, market estimates are another $4-5 billion more could be on its way. In a period of general gloom and doom, that’s something to celebrate.