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Macro Economics

Notes
registered a growth of 2.6% y-o-y after registering declines in the previous three quarters.
This largely reflects the ongoing recovery in the domestic economy and global trade.
The invisibles account (net) declined somewhat on sequential basis from $20 billion in
Q2FY10 to $18.7 billion in Q3FY10. Among major heads of invisibles, gross software
earnings improved. However, the positive effect of increased software earnings was negated
by reduction in private remittances.

Capital account surplus in Q3FY10 at around $14 billion was significantly lower than $21
billion in the previous quarter. The lower capital account surplus had, in fact, been the
direct cause of the deceleration in the overall BoP surplus in Q3FY10. Such slowdown in
the capital account took place largely on the back of lower foreign direct investment (FDI)
and portfolio inflows.
On the portfolio side, decline in both Foreign Institutional Investments (FIIs) and American
depositary receipts/global depositary receipts contributed to the trend. However, increase
in short-term trade credit compensated somewhat for the decline in foreign investment.
The outgoing FDI remained stable, but inward FDI declined.

From an overall deficit of around $20 billion in April-December 2008, BoP turned into a
surplus of around $11 billion during the corresponding period in 2009. The large swing
was triggered mainly by the capital account. The capital account surplus expanded from a
mere around $7 billion during the first nine months of FY09 to around $42 billion during
the corresponding period in FY10. This trend can be largely explained by the liquidity
injection by major central banks across the globe and the associated recovery in global
risk appetite.
Trade deficit also improved over the stated period on account of faster fall in imports as
compared with exports. The current account deficit, however, weakened further on account
of lower earnings on the invisibles account.
Exports and imports continue to show improvement on sequential basis on the back of
recovering global economy. We expect these trends to continue. The risk to that view
may, however, arise from the possibility of any added trade protectionism adopted by
some of the major economies, which cannot be ruled out.
Software earnings continue to provide support to the invisibles account. However, the
rupee appreciation—not just against the dollar but also against the euro and pound—
could hurt the invisibles as well as trade account in Q4FY10. Slowdown in FIIs and FDI
flows has been observed in Q3FY10, although BoP was still in surplus. Going forward, the
global risk appetite would be extremely crucial for FII flows. FDI trends are likely to be
more resilient unless there is a fresh bout of global uncertainty.

Question:
Why do you think India’s BOP surplus is shrinking?

Source: www.livemint.com
Major Highlights of BOP during April-December 2010

1. Despite improvement in net invisibles surplus, the current account deficit widened during
April-December 2010 mainly due to higher trade deficit as compared to the corresponding
period of last year. At this level, the CAD works out to 3.1 per cent of GDP during
April-December 2010.

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