Current account deficit falls to 1.2% on higher services exports

The current account deficit narrowed to 1.2 per cent of GDP at $6.2 billion in the June quarter on contraction in trade deficit and higher earnings from services exports, the Reserve Bank said on Friday.

The June quarter CAD figure is lower than $7.8 billion, or 1.6 per cent of GDP, in the year-ago period, but higher than 0.2 per cent for the March quarter.

This improvement is mainly on account of the merchandise trade deficit of $34.2 billion during the first quarter which contracted on year-on-year basis due to larger absolute decline in merchandise imports relative to merchandise exports, RBI said in the quarterly balance of payments data.

Reacting to the improvement in CAD, Economic Affairs Secretary Shaktikanta Das tweeted, "The first quarter CAD at 1.2 per cent 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 sentiments related to emerging market currencies once the US Federal Reserve hikes rates.

Lower CAD largely reflects the lower net outflow of primary income. The benefit of the steep reduction in crude prices was offset by higher imports of other items and a decline in exports, she added.

The central bank further said higher net earnings through services and lower outflow on account of primary income, which includes profit, dividend and interest, also aided in the narrowing of the current account gap.

There was a marginal drop in private transfer receipts, which primarily includes remittances by the diaspora, to $16.2 billion, for the reporting period, the RBI said.

The net foreign direct investment inflows were up at $10.2 billion for the April-June period, as against $7.9 billion for the year-ago period, the central bank said.

The portfolio flows stood at a negative $2.3 billion for the period as against inflows of $12.4 billion a year ago, the RBI said, adding that this was almost entirely in the debt segment.

The NRI deposits more than doubled to $5.9 billion on a year-on-year basis, it said. 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, the RBI said.