Higher profit repatriation and wider trade deficit contributed to CAD in Q2

The current account – the sum of import and export of goods and services- in the balance of payments ended in a deficit of $ 9.6 billion or 1.3 per cent of GDP during the July-September quarter ending the surplus earned same period a year ago as the crude and commodity imports rose sharply as also foreign investors taking back higher amounts as income from their investments in India.

“The deficit in the current account in Q2’2021-22 was mainly due to widening of trade deficit to $ 44.4 billion and an increase in net outgo of investment income.” The Reserve Bank said in a release.

“Continuation of recovery in economic activities coupled with surge in prices of key commodities in the trade basket kept the import bill at a record level in Q2’FY22” said a research note by ratings firm India Ratings.

Foreign investors- through both FDI and portfolio investments- took back home 15 per cent higher amounts as income from their investments in India. They repatriated $ 15.8 billion during July-September quarter compared to $13.6 billion repatriated in the same period a year ago.

Net services receipts increased on a year-on-year (y-o-y) basis, on the back of robust performance of the exports of computer and business services, RBI said. Software services income helped to rein in the current account deficit during the quarter. It increased by around 20 per cent to $ 26.8 billion from $ 22.3 billion in the same period a year ago. Also, private transfer receipts, mainly representing remittances by Indians employed overseas, amounted to $ 21.1 billion, an increase of 3.7 per cent from their level a year ago.

“We expect the current account deficit to print in excess of US$25 billion in Q3 FY2022, rivaling the size of the full year CAD in FY’2020” said Aditi Nayar, chief economist at India Ratings. “For the year as a whole, we foresee the CAD at US$40-45 billion, or around 1.4% of GDP”.

In the capital account, net foreign direct investment recorded an inflow of $ 9.5 billion, lower than $ 24.4 billion a year ago, net foreign portfolio investment was $ 3.9 billion as compared with $ 7.0 billion a year ago, net external commercial borrowings to India recorded inflow of $ 4.1 billion in Q2’2021-22 as against an outflow of $ 3.7 billion a year ago. While non-resident deposits recorded net outflow of US$ 0.8 billion as against an inflow of $ 1.9 billion in Q2’2020-21. But an $18.8 billion net inflow of other capital during Q2’2021-22 compared to an outflow of $737 million in the same period , a year ago helped to push the capital account surplus to $ 40 billion compared to a surplus of $15.2 billion in the same period a year ago. As a result, the over balance of payments remained flat at around $31 billion for the quarter.