The balance of payment out-turn is marginally positive at $0.5 billion for the first quarter of FY13. However, we do not think this is likely to sustain and expect end-FY2013 BoP deficit of US$8.4 bn. This is based on our anticipation of continuing drag on the CAD from the net interest income outflows.

Further, services sector inflows may not see large increases due to the global slowdown continuing. We now estimate the CAD/GDP for FY2013E at 4.1%, higher than our previous estimate of 3.6%. While policy steps have been in the right direction, we remain cautious of building up any significant improvements under the capital account immediately with global risk conditions still not conducive.

CAD improved in 1QFY13 at US$16.6 bn (3.9% of GDP) against a deficit of US$21.8 bn in 4QFY12 (4.5% of GDP).

Even as exports were lower in 1QFY13, there was a sharper contraction in the imports from all ends as (1) gold & silver imports came down by 47.5% yoy due to higher gold prices (including effect of customs duty increase) and also jewelers’ strike to protest against excise tax increases, (2) decline in the oil imports due to a sharp drop in the international crude oil prices and (3) a moderation in non-oil non-gold imports ((-)0.3% as compared to 16.2% rise in 1QFY12). The net investment income has now emerged as a significant drag on the current account deficit.

This is mainly due to a sharp rise in the net International Investment Position (IIP) over the years, implying a larger interest outgo on the liabilities than interest income on assets. Further, interest incomes have been hit on account of low interest rates abroad. This drag from the net investment income failed to be supplemented by increases in the invisible receipts under software services and the private transfers.

Overall capital flows for 1QFY13 was at US$17 bn (4.0% of GDP) against US$16.6 bn (3.4% of GDP) in the previous quarter. This was despite a sharp contraction in the FII flows in 1QFY13 against US$14 bn in 4QFY12.

Equity flows in 4QFY12 had improved significantly with a markedly better risk condition in the global markets with the 3-year LTRO money. Further, policy of the RBI to enhance the debt limits in the G-sec and the corporate bond markets for the FIIs had led to an increase in the FII debt inflows.

The negatives of a poor FII flows in 1QFY13 was balanced out by a sharp increase in net FDI flows, banking capital (on account of higher NRI deposits) as also by an increase in the short-term trade credit.