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Current account surplus nears record $20 billion in June quarter

MUMBAI: The country’s current account surplus jumped to an all-time high of $19.8 billion (3.9% of GDP) for the April-June period — the first quarter of FY21 — due to a collapse in imports. The first quarter of the previous year had seen a deficit of $15 billion (2.1% of GDP). The preceding January-March quarter had seen India’s first current account surplus in 13 years, partly because of slower imports from China due to the Covid outbreak there.
Lower imports in the first quarter of FY21 resulted in the trade deficit narrowing to a 15-year low of $10 billion. Services surplus, led by IT exports, were almost steady at $20.5 billion despite a lockdown. Private transfer receipts, mainly representing remittances by Indians employed overseas, amounted to $18.2 billion — a decline of 9% from a year ago.
A current account surplus, even though it is brought about by a decline in economic activity, is good from a macroeconomic standpoint as it reduces pressure on the rupee. However, the drop in imports are also a sign of weak domestic demand.
Meanwhile, on the capital account front, there was a net outflow of $392 million in the June quarter ($14 billion the year-ago period) in foreign direct investment (FDI). Net foreign portfolio investment was $600 million as compared to $4.8 billion in Q1 of FY20 as net purchases in the equity market were offset by net sales in the debt segment.
With repayments exceeding fresh disbursals, external commercial borrowings to India recorded a net outflow of $1.1 billion in Q1 of FY21, as against an inflow of $6 billion a year ago, the RBI said. As a result, the capital account surplus shrunk to $552 million (which was $28.6 billion a year ago) and the overall balance of payments surplus of $19.8 billion was largely supported by the current account.
“Despite the economic challenges, India’s strong external balances remain a silver lining. Amid weakness in domestic demand, imports have fallen substantially, which has led to a dramatic improvement in the goods trade balance,” Barclays chief economist Rahul Bajoria said. FDIs are expected to rise in Q2 because of some big-ticket investments announced by Reliance Industries.
“Going by the trends seen in July and August, we may expect a surplus to prevail in Q2 too, and with GDP poised to decline in this quarter once again, we can expect a current account surplus in the range of 2-3%,” CARE Ratings chief economist Madan Sabnavis said.

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