Latest data by the Reserve Bank of India reveals that the central bank has spent $11.3 billion of foreign exchange reserves during the first quarter of FY 2019 to offset the dollar demand, its highest since the third quarter of FY 2012. With the current account deficit (CAD) expected to widen with rising crude oil prices, is the BoP building on pressure?
The Balance of Payments (BOP) is the difference between dollar inflow and outflow. A negative number indicates dollar outflow, while a positive denotes higher dollar inflow.
BOP constitutes of two components — current account and capital account. Current account is the difference between exports and imports, while capital account is the net capital receipts/payments.
Higher crude prices have widened the current account deficit to $15.83 billion (2.4 per cent of GDP) during Q1 FY19, the highest in five years as compared to $13.7 billion in Q4 2018 and $14.98 billion in Q1 FY18.
Foreign capital investments, which were traditionally used to fill the gap created by excessive imports over exports, also remained helpless. About $9.70 billion foreign direct investment came into India, while foreign portfolio investors pulled out $8.15 billion. Thanks to non-resident Indians, the country saw remittances of $3.5 billion in Q1 FY19 compared to $1.2 billion a year ago.
A good number of analysts argue that BOP is a lagging indicator as data is delayed by more than a month and released once in a quarter. Since the change in FX reserves and BOP are closely related, one can draw a conclusion on BOP based on change in FX reserves (released weekly).
Meanwhile, Brent crude price averaged at $74.85 during the Apr-Jun 2018 quarter and the CAD reported was $15.83 billion. Capital account at $5.26 billion was able to bring down the BOP to -$11.3 billion.
At present, crude prices are averaging $81.08. Foreign portfolio investors have withdrawn around $1.9 billion from domestic equity and debt markets, with the pace of outflow increasing in October.
In the prevailing conditions, the CAD is likely to slip above 2.7 per cent of the GDP and combined with capital outflow, this could further deteriorate the BOP.
The author is a fundamental research analyst at Karvy Forex and Currencies Pvt Ltd