CAD narrows to $300million in Q1 on massive import contraction.

MUMBAI: India's economic position with the external world improved substantially in the June quarter with the current account deficit, the excess of imports over exports, plunging to a decade low supported by a collapse in commodity prices, but that fell short of expectations of a surplus.

Balance of payments, which combines trade and investments, remained in surplus but it shrank as the foreign direct investment collapsed, data from the Reserve Bank of India shows. The complete elimination of the CAD should help the rupee remain stable, while economists forecast an increase in the deficit from a 10-year low.

"The current account is somewhat worse than what we had expected; we were expecting a 0.5% surplus,'' said Saugata Bhattacharya, chief economist at Axis Bank. "The key disappointment in current account is that remittances have fallen more sharply."

Current account deficit narrowed to $ 0.3 billion or 0.1% of GDP in the June quarter, from $ 6.1 billion or 1.2% of the gross domestic product a year earlier. Trade deficit, or the difference between merchandise exports and imports, shrank to $23.8 billion, down from $34.2 billion a year ago.

While the expectations of surplus may have been belied, it is a remarkable turnaround for an economy which was running a CAD of 4.8 percent of the GDP in fiscal 2013. The double-digit inflation and citizens' fetish to own gold to beat price rise, led to the government and the Reserve Bank of India imposing curbs on gold imports. In the September quarter in 2012, CAD was at a record high of 5.4% of the GDP.

Private transfer receipts, mainly representing remittances by Indians employed overseas, were $ 15.2 billion, down from $17.3 billion in the previous comparable quarter.

The overall balance of payments surplus shrank 40% to $ 6.9 billion from $ 11.4 billion in the same period a year ago. NRI deposits at $ 1.4 billion tumbled 76% in the June quarter from $ 5.9 billion in the same period a year ago.

"The BoP has shrunk because remittances have declined, FDI has moderated and capital inflows were not that strong, but second quarter the inflows have been strong,'' said Soumya Kanti Ghosh, chief economic advisor, State Bank of India. ``If oil prices stage a recovery invisible receipts could turn for the better."

Net foreign direct investments shrunk 57% to $4.1 billion from $10 billion a year ago which led to the overall capital account surplus shrunk to $7.1 billion during the latest quarter from $ 8.6 billion in the same period a year ago.

There are expectations that the CAD could begin to deteriorate if the gold prices improve. Whenever the gold prices gain, there may be a tendency to accumulate since it is considered a safe haven asset.

"CAD will slip into a fairly negative territory next quarter because it will depend upon how gold moves. Low gold imports are unlikely to sustain in the coming quarters. We will still see a current account deficit for the full year" said Axis' Bhattacharya.

Source : economictimes.indiatimes.com