India's current account improves as trade deficit shrinks

• The current account deficit declined to 0.9% of gross domestic product in the second quarter of the fiscal year ending March 2020 from 2.9% in the same period a year ago.
• The deficit measures the difference between the value of a country's imported and exported goods and services.
• The contraction ... was primarily on account of a lower trade deficit at $38.1 billion as compared with $50.0 billion a year ago.

MUMBAI: India's current account deficit narrowed in the September quarter of the fiscal year as the trade deficit shrank, central bank data showed on Tuesday, but the momentum may not be sustainable.

The current account deficit declined to 0.9% of gross domestic product in the second quarter of the fiscal year ending March 2020 from 2.9% in the same period a year ago. On a quarterly basis, it shrank from 2.0% of GDP in the June quarter.

The deficit measures the difference between the value of a country's imported and exported goods and services.

"The contraction ... was primarily on account of a lower trade deficit at $38.1 billion as compared with $50.0 billion a year ago," the Reserve Bank of India said in the release.

The trade deficit stood at $12.12 billion in November compared with $16.67 billion a year earlier, trade ministry data showed earlier this month.

The "trade deficit is lower primarily because imports have fallen at a faster rate than exports due to weak manufacturing activity and lower imports of raw materials and capital goods," said Rupa Rege Nitsure, chief economist at L&T Financial Services.

Data last month showed annual economic growth slowed to 4.5% in the September quarter, its weakest pace since 2013.

The current account deficit stood at $6.3 billion in the September quarter versus $19 billion a year ago. The merchandise trade deficit narrowed to $38.1 billion from $50.0 billion, the central bank said.

Balance of payments, the difference between the current account and capital account, stood at a surplus of $5.1 billion in the September quarter compared with a deficit of $1.9 billion a year ago, data showed. However, the narrowed from $14 billion seen in the June quarter.

Net inflow on account of external commercial borrowings stood at $3.2 billion compared with $2.0 billion last year. Net foreign direct investment was largely unchanged at $7.4 billion.

Private transfer receipts, mainly representing remittances by Indians employed overseas, rose to $21.9 billion, up 5.2% from a year ago, the data showed.

"Both the critical components of foreign exchange reserves - exports and FDI - have not shown any improvement Y-O-Y. On the other hand, portfolio inflows (hot money) and ECBs (debt capital) have increased significantly. This kind of improvement is not sustainable," L&T's Nitsure said.