India FY18-19 Q4 CAD Analysis - Reduction led by narrowing trade deficit

CAD narrowed sharply on a sequential basis to USD 4.6 bn (0.7% of GDP) in Q4 from USD 17.7 bn (2.7% of GDP) in Q3 FY2019, and USD 13.0 bn (1.8% of GDP) seen in Q4 FY2018. The number was pleasantly lower than street expectations, largely boosted by higher invisibles. However, on an annual basis, the CAD swelled to USD 57.2 bn (2.1% of GDP) in FY2019 from USD 48.7 bn (1.8% of GDP) in FY2018, with a sharply higher trade deficit fueling the worsening. 



Exports rose to a multi-quarter high in Q4, while tepid non-oil non-gold imports kept the import bill subdued. As a result, the trade deficit narrowed by a considerable ~USD 14 bn sequentially. Imports of non-monetary gold rose sequentially, and has continued to pick up in FY2020, which could be a worry going ahead.

Net services receipts stayed flat in Q4, in line with the print in Q3, as a sharp fall in business services receipts was offset by rises in transportation and financial services receipts. However, transfer receipts fell slightly by ~7% QoQ, as private transfers dipped sharply in line with modest oil prices seen over that quarter. Income related outflows declined sequentially in Q4 due to smaller outflow of investment income, which supported the invisibles account.

Net FDI flows eased to USD 6.4 bn in Q4 from USD 7.3 bn in Q3.  Encouragingly, net portfolio inflows rose to a seven-quarter high of USD 9.4 bn in Q4, after registering cumulative outflow of USD 10.1 bn between Q1-Q3 FY19, with investors sentiment getting a boost as major central banks shifted to a dovish stance and the opinion polls (released in Q4 FY19) suggested formation of a stable government. Inflows were seen in both debt (USD 1.3 bn) and equity markets (USD 8.2 bn)

Despite the minor increase in CAD, we expect it to be adequately funded by capital flows, thereby resulting in a BoP surplus of USD 19 bn vs. a deficit of USD 3.3 bn in FY19. With systemically important central banks turning dovish and domestic political stability post the general elections, there is likelihood of foreign investment inflows remaining buoyant. 

That said, a key risk to watch out will be escalating in trade tensions which could adversely impact global growth as well as flows to EMs. Further, in case of India, trade uncertainties could spill over to the services sector.


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