A drop in crude oil prices and improved exports in services helped reduce the first quarter current account deficit (CAD) to $6.2 billion, or 1.2% of the country's gross domestic product (GDP), from $7.8bn (1.6%) in Q1FY15.
However, on a quarter-onquarter basis, the CAD was higher when compared to $1.3 billion (0.2%) in Q4 of 2014-15.Data released by the Reserve Bank of India showed that the value of petroleum, oil and lubricant (POL) basked dropped sharply from $40 billion to $24 billion. A large component of this is crude and the fall in value of imports is due to the crash in crude prices globally .
Commenting on the narrowing of the deficit, RBI said, “This improvement was mainly on account of the mer chandize trade deficit ($34.2 billion during Q1 of 2015-16) which contracted on a yearon-year basis due to a larger absolute decline in merchandize imports relative to merchandize exports.“
A reduction in the CAD is positive for the exchange rate as it points to a lower demand for the dollar. Dealers, howe ver, do not expect an immediate strengthening of the rupee and say that in the short term, the exchange rate movement will be determined by interest rate actions of the US Federal Reserve.
In the first quarter, remittances by overseas Indians dropped marginally . This is reflected by the lower number under the head private transfer receipts, which stood at $16.2 billion. However, non-resident Indian (NRI) deposits received by commercial banks during the quarter at $5.9 billion were more than double the net inflows into these accounts in Q1of last year.
Net loans availed by banks witnessed an inflow of $5.4 billion, mainly on account of a fall in foreign currency assets held abroad by banks.
Reacting to the improvement in CAD, economic affairs secretary Shaktikanta Das tweeted, “The first quarter CAD at 1.2% is better than last year. Have to remain watchful.“
Rating agency ICRA's senior economist Aditi Nayar said the improvement in CAD will bolster the rupee if there is a drop in sentiment related to emerging market currencies once the US Fed hikes rates.
