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Current account moves back into deficit in 3QFY21

Expect CAD to widen in subsequent quarters

* India’s current account balance moved to a deficit of USD1.7b (or 0.2% of GDP) in 3QFY21, against an average surplus of USD17b (3% of GDP) in 1HFY21. CAD was marginally better than the market consensus of USD2.4b (or 0.3% of GDP). Merchandise deficit stood at 4.7% of GDP in 3QFY21, vis-à-vis 2.2% of GDP in 1HFY21, while the surplus on the invisibles (services + income) account was at a 10-quarter low of 4.4% of GDP.

* Net foreign capital inflows in India amounted to USD33.5b, the highest ever in absolute terms; however, they stood at 4.5% of GDP, the highest in the past six years, but less than half the peak inflows of 11.7% of GDP reported in 2QFY08. Foreign direct investment (FDI) inflows stood at USD17b, followed by an all-time high of USD25b in 2QFY21. Foreign portfolio investment (FPIs) inflows came in at USD21.2b – the highest in absolute terms.

* As foreign capital inflows outpaced CAD, India added more than USD30b in foreign exchange reserves (FXR) for the second consecutive quarter in 3QFY21.

* With a marginal uptick in investments to 29.5% of GDP and small CAD in 3QFY21, gross domestic savings (GDS) stood at 29.3% of GDP last quarter. For the three quarters in FY21, however, gross domestic savings (GDS) stood at 28.8% of GDP, lower than 29.6% of GDP in the corresponding period in FY20.

* Current account posts deficit after three successive surpluses in 3QFY21: India’s current account balance moved to a deficit of USD1.7b (or 0.2% of GDP), after reporting an average surplus of USD17b (or 3% of GDP) in 1HFY21 (Exhibit 1). It was marginally lower than the market consensus of a deficit of USD2.4b (or 0.3% of GDP). This implies India’s current account surplus was 1.7% of GDP in 9MFY21.

* Merchandise deficit drives CAD in 3QFY21: Merchandise trade deficit stood at 4.7% of GDP in 3QFY21, vis-à-vis 2.2% of GDP in 1HFY21 (Exhibit 2). The higher merchandise deficit was primarily attributable to much slower decline in imports (-4.7% YoY in 3Q vis-à-vis -24.4% in 2Q), while the fall in merchandise exports (at 4.9% YoY) was similar to that in 2QFY21 (-5.5% YoY). Notably, although the deficit on petroleum products widened last quarter, the expansion in merchandise trade deficit was broad-based. The surplus on the invisibles (services + income) account was also at a 10-quarter low of 4.4% of GDP – as exports of invisibles fell 1.6% YoY, while imports declined just 1.5% in 3QFY21. Excluding petroleum products, India had a current account surplus of 2% of GDP, lower than in the past four quarters, but higher than in the pre-COVID era.

* Capital inflows increase substantially in 3QFY21: Net foreign capital inflows in India amounted to USD33.5b, the highest ever in absolute terms. However, they stood at 4.5% of GDP, the highest in the past six years, but less than half the peak inflows of 11.7% of GDP reported in 2QFY08. FDI inflows stood at USD17b, followed by an all-time high of USD25b in 2QFY21. FPIs inflows came in at USD21.2b – the highest in absolute terms. Again, as a percentage of GDP, FPI inflows were 2.9% in 3QFY21 – lower than ~4% of GDP in FY08 and the peak of 5% of GDP in 2QFY11. As foreign capital inflows outpaced CAD, India added more than USD30b in FXR for the second consecutive quarter in 3QFY21 (Exhibit 3).

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