India Balance of Payments

Rising current account deficit to set further pressure on the rupee.

Published quarterly by Reserve Bank of India. Updated until the April-June 2018 quarter. (Published on September 7th, 2018)

Recent Data Trend

India's current account deficit (CAD) worsened to USD 15.8 billion in Apr-Jun'18 (Q2 FY19), highest in nearly five years. In terms of the share to GDP, the current account deficit stood at 2.4% of GDP, rising from 1.9% of GDP in FY18. The rise in current account deficit will surely pose a concern as the economy struggles with the weakening rupee (hitting an all-time low of 72 against the USD) amidst global trade tensions.

The widening of CAD was led by an increase in not just oil imports (due to rising crude oil prices) but even the non-oil-non-gold imports amidst moderate growth in exports leading to a higher trade deficit of USD 45.7 billion in Q2 FY19, from USD 41.9 billion a year ago.

The capital and financial account surplus just improved by USD 1.1 billion in the last one year to USD 16.6 billion in Q2 FY19, thus proving inadequate to fund the soaring CAD. The strengthening of USD against all the emerging market currencies since the beginning of 2018, resulted in the valuation loss of forex reserves. Further, the outflow of funds on account of monetary tightening by the Fed exacerbated the reduction of forex reserves. Consequently, India recorded a decline in the forex reserves by USD 18.8 billion in Q2 FY19 in contrast to the addition of USD 16.6 billion to the forex reserves pool in Q2 FY18.

The depreciating rupee is not likely to help the export pickup soon, while threats of cost-push inflation loom as the rupee continues to depreciate and the global crude oil prices remain elevated. The higher inflation would surely pose a headwind to the growth recovery India is going through, expanding at a two-year high pace of 8.2% year-on-year (YoY) in Q2 FY19.

The RBI in its annual report of 2017-18 stated that the CAD is expected to be largely financed by higher FDI inflows. However, as of now, the FDI in India stood at USD 13 billion in Q2 FY19, just USD 3 billion higher since Q2 FY18. In addition, the portfolio investments have also been disappointing with money being pulled out both from the debt and equity market resulting in a net outflow of USD 8.1 billion as against a net inflow of USD 12.5 billion in Q2 FY18.

We believe, the threat of rising CAD coupled with the risks of fiscal slippage (fiscal deficit at 86.5% of the budgeted estimate of FY19 in Apr-Jul'18) in the pre-election year might reinstate the twin-deficit situation. Consequently, adding to the worsening of the macroeconomic situation. The only respite seems to be in terms of increasing growth led by consumption and investment demand, improvement in the manufacturing growth, and the comforting level of forex reserves (over USD 400 billion).

At present, quick actions need to be mooted over reducing CAD in order to preserve macroeconomic stability in the domestic economy and mitigate any further depreciation of the rupee.

Brief Overview

The Balance of Payments (BoP) records all economic transactions between residents of a country and the rest of the world. The BoP account consists of Current account, Capital account, and Financial Account. 

The current account includes flows of goods, services, primary income, and secondary income between residents and non-residents and thus constitutes an important segment of BoP. The primary income account reflects the amounts payable and receivable in return for providing temporary use of labour, financial resources, or non-produced non-financial assets (natural resources). The secondary income account shows redistribution of income between resident and non-residents, i.e when resources for current purposes are provided without economic value being exchanged in return (transfers).

On the other hand, the capital account comprises credit and debit transactions under non-produced non-financial assets and capital transfers between residents and non-residents. Thus, acquisitions and disposals of non-produced non-financial assets, such as land sold to embassies and sales of leases and licenses, as well as transfers which are capital in nature, are recorded under this account.

The financial account reflects net acquisition and disposal of financial assets and liabilities during a period. Further, it shows how the net lending to or borrowing from the rest of the world has occurred. Conversely, it shows how the current account surplus is used or the current account deficit is financed.

The Reserve Bank of India (RBI) has been compiling and publishing Balance of Payments (BoP) data for India since 1948. Since then, several developments have taken place both globally and domestically.

Considering these developments and to bring out a comprehensive Balance of Payments Manual documenting current practices, procedures of compilation, presentation, coverage and sources of data for India’s balance of payments and assess them in relation to international best practices, India has shifted from BPM 5,1993 manual to BPM6,2009 method of accounting and classifying the data.

The above data has been compiled as per the latest IMF's BPM6 standard of classification. For further details visit the official website.

Next Release Date: December 7, 2018.

Balance of Payments- Annual