India’s full year FY 2015-2016 current account deficit to drop below 1%

India’s current account deficit in Q4 2015 narrowed to USD 7.1bn or 1.3% of GDP from Q3’s USD 8.7bn or 1.7% of the GDP. While this shows a modest rebound, the breakdown saw narrowing of trade deficit along expectations but waning strength in invisibles’ earnings. This resumed concerns that while lower commodities’ prices has helped narrow the imports bill, export growth weakness had restricted the beneficial effect on the trade balance. The non-merchandise receipts have been impinged by global volatility and decelerating external demand.

In Q4, trade deficit narrowed to USD 34bn as compared with the deficit of USD 38.6bn in Q3. However, net service receipts from financial services and transport services, and private transfer receipts from remittances moderated in Q4.

On the financial front, portfolio inflows reduced but the rebound in net foreign direct investment picked part of the slack. Portfolio investments recorded a smaller net outflow of USD 0.2 billion in the fourth quarter as compared with Q3’s USD 3.5 billion as equity outflows were almost matched by inflows into the debt space. Meanwhile, non-resident deposits diminished. Overall, the balance of payments in the fourth quarter rose to a surplus of USD 4.1bn from a small deficit recorded in the third quarter.

Some significant positive aspects in the balance of payments confirmed the rebound in the external balances and therefore it is no longer a flash-point for the Indian economy. India’s Apr-Dec current account deficit is at 1.4% of GDP, while the full year deficit is expected to drop below 1%. This will be the third continuous year of below 2% deficit for the economy.

Furthermore, the dependence on portfolio flows continues to decline as net FDI inflows recover. In Q4 alone, the net FDI inflows were enough to totally fund the current account gap, hence alleviating the Indian economy’s vulnerability to global volatility and fickle hot money flows.