1 Apr 2017

India Macro Insight-BoP Prof. Biswa Swarup Misra

BoP in Q3 of FY’17 underscores the need to strengthen forex reserves by taking chief.economist@bankofbaroda.com
advantage of dollar liquidity.

In Brief Major Components of BoP

 BoP in Q3 of FY’17 reflected widening of CAD, net FII outflow and drop in net FDI and (US$Bn)
depletion of forex on a sequential basis. Components
Dec-
15
Mar-
16
Jun-
16
Sep-
16
Dec-
16

 The combined effect of sluggish FDI and outflow of FII led to the depreciation of the Current account
Deficit (CAD)
-7.1 -0.3 -0.3 -3.4 -7.9

rupee vis a vis the dollar in the Dec 2016 quarter. The rupee dollar exchange rate which Trade Balance -16.0 -8.7 -8.1 -9.4 -15.6
(Goods and
was 66.85 in October depreciated to 67.95 in December 2016. Services)

 The recent strengthening of rupee is guided by expectations of FIIs on the ability of the Exports
Imports
102.8
118.8
105.2
113.9
106.0
114.1
108.3
117.7
110.9
126.5
government to pursue reform oriented policies, post the election outcomes in some of Primary income -6.4 -6.6 -6.2 -7.9 -6.2
Secondary 15.3 15.0 14.0 13.9 13.9
the bigger states in March 2017 and the positive developments with regard to GST roll income
out. Invisibles 26.9 24.4 23.6 22.2 25.4
Capital Account 0.0 0.0 0.2 -0.0 -0.0
 However, RBI should guard itself from a possible depreciation of rupee from an expected Financial Account
FDI
6.8
10.7
0.1
8.8
-0.0
3.8
4.3
16.9
7.4
9.8
slump in Q4 GDP growth on account of lagged impact of demonetisation and uncertainties FPI 0.6 -1.5 2.1 6.1 -11.3
associated with the implementation of GST which can make FIIs wary about Indian Accretion(-)/ -4.1 -3.3 -6.9 -8.5 1.2
Depletion (+) of
markets. Forex

 BoP numbers for Q3 underscores the need for mopping dollars by RBI to build the forex Note-All figures are on a net basis

reserves so as to avoid exchange rate volaitility in the event of FII disinterest in the Indian
economy.
CAD AS PERCENT OF GDP

-0.1
-0.1
-0.1
-0.2

-0.6
-0.9
-1.2

-1.2

-1.4

-1.4
-1.5
-1.5

-1.7
-2.2
-3.6
-4.8
D E C - 1 2 -6.8

DEC-13

DEC-14

DEC-15

DEC-16
MAR-13

MAR-14

MAR-15

MAR-16
JUN-13
SEP-13

JUN-14
SEP-14

JUN-15
SEP-15

JUN-16
SEP-16

GOLD IMPORT(US$BN)
17.8

Note: All figures are on a a net basis

16.5
15.8

Only components with major share in overall BoP have been included.

Drivers of BoP in Q3 of 2016-17

11.1

10.0

 The December quarter involved a number of significant developments both on the global
9.8
9.0
8.5
7.7

7.5
7.1

and domestic front which shaped India’s BoP.

5.3

5.3

 At the domestic front, the historic step of demonetisation created some amount of
4.0
3.9
3.9
3.1

uncertainty with regard to its impact on growth.

 The protectionist flavored announcements with a commitment for massive
DEC-12
MAR-13

DEC-13
MAR-14

DEC-14
MAR-15

DEC-15
MAR-16

DEC-16
JUN-13

JUN-14

JUN-15

JUN-16
SEP-13

SEP-14

SEP-15

SEP-16

infrastructure spending by the new US presidential elections kept markets at the edge.
 Improving labour market conditions prompted the US Fed to increase policy rate in
December 2016 after a gap of one year.

@ 2017 Bank of Baroda. All rights reserved

Please refer page No. 3 for disclaimer.
 2

Key Takeaway
Export and Import Growth

21.8
Current Account

17.5
10.7


9.4
CAD in Q3 of FY’17 deteriorated (in absolute terms as well as a percentage of

9.0
8.3
GDP) on both sequential and annual basis. Inspite of improved trade balance in

5.5
4.6
Q3 of FY’17; CAD widened due to lower invisible receipts. Net invisibles declined

4.3 0.1
2.4
1.4
by 5.5% in Q3 of FY’17 primarily due to lower earnings from software, financial
services and charges for intellectual property rights.

-0.1

-0.1
-0.7
 CAD increased to $7.9 billion in Q3 of FY’17 compared to $3.4 billion in Q2 of

-5.6

-6.8
-7.4
FY’17 and $7.1 billion in Q3 of FY’16. CAD as a percentage of GDP increased to
1.4% in Q3, FY 2016-17 compared to 0.6% in Q2, FY 2016-17.

-13.0
-13.5


-17.9
Trade Balance strengthened owing to improved exports. Exports of goods and

-22.9
services increased by 7.8% in Q3 of FY’17 compared to a decline of 13.3% in Q3
of FY’16. Imports on the other hand, increased by 6.5% in Q3 of FY’16 compared

16-Apr

16-May

16-Jun

16-Jul

16-Aug

16-Sep

16-Oct

16-Nov

16-Dec

17-Jan

19-Feb
to a decline of 13.7% in Q3 of FY’16.
 Gold Imports (Nonmonetary gold) increased by 8.7% in Q3 of FY’17 compared to
Exports Imports

a decline of 19.0% in Q3 of FY’16. Trade Deficit as a percentage of GDP stood at

2.8 % in Q3 of FY’17 compared to 3.1% in Q3 of FY’16.

TREND IN FDI AND FPI INFLOWS
Inspite of an improved trade balance, the increase in current account deficit is ($US BILLION)
attributable to:

16.9
 Decline in Net Primary Income by 3.6% in Q3 of FY’17 compared to an

12.5

10.7
10.0
increase of 10% in Q3 of FY’16.

9.8
9.3

8.8
 Within Primary Income, investment income registered a sharp decline of

6.5

6.1
3.8
2.4% in Q3 of FY’17. The major slump was attributable to the sharp fall in

2.1
0.6
Portfolio Investment especially investment income on equity and
investment fund shares.

0.0

-1.5
 Secondary Income was impacted due to decline in Private transfer receipts,

-3.5
mainly representing remittances by Indians employed overseas.

D E C - 1 6 -11.3
Capital Account Balance

MAR-15

SEP-15

MAR-16

SEP-16
DEC-15
JUN-15

JUN-16
Capital account registered net outflow of US$0.02 billion in Q3 of FY’17 as against
net inflow of US$0.02 billion in Q3 of FY’16.
 Capital Transfers credited to BoP account declined primarily due to decline in Net FDI Net FPI
private capital transfers.
Financial Account
 The second rate hike by Fed after a gap of one year coupled with uncertainties
associated with the possible adverse impact of demonetisation on growth led to FIIs Major Components of BoP- As Percent of
GDP
pulling out funds from the Indian market.
2015-16 2016-17
 Portfolio Investment recorded an outflow both in equity and debt segments. FPI Component Q1 Q2 Q1 Q2 Q3
outflow was US$11.3 billion in Q3 of FY’17 as against an inflow of US$ 0.6 billion in
Q3 of FY’16 and US$6.1 billion in Q2 of FY’17. Current -1.4 -0.1 -0.1 -0.6 -1.4
Account
 FDI was also quite sluggish in the December quarter and dropped to US$9.8 billion Deficit
Trade -3.0 -1.6 -1.5 -1.7 -2.8
in quarter ended Dec-2016 from US$16.9 billion in the September quarter. Deficit

 Reflecting the redemption of FCNR (B) deposits, non-resident Indian (NRI)

Capital
Account
0 0 0 0 0

deposits declined by US$ 18.5 billion in Q3 of FY’17 as against an inflow of US$ 1.6 Financial 1.3 0.03 -0.01 0.7 1.3
Account
billion a year ago.
FDI 2.0 1.6 0.7 3.0 1.7
 Net Loan receipts through external assistance, ECBs and Banking Capital stood at FII 0.1 -0.3 0.4 1.1 -2
$20.4 billion in Q3 of FY’17 compared to net repayments of US$0.8 billion in Q3 of
FY’16. Errors and 0.1 0 0 -0.2 0.1
Omission
 Borrowings through the External Commercial Borrowings (ECB) route indicated a
rise in repayment of about US$ 1.4 billion in Q3 of FY’17.
 Foreign exchange reserves in Q3 of FY’17 depleted by US$ 1.2 billion as against an
increase of US$ 4.1 billion in Q3 of FY’16 and US$8.5 bn in Q2 of FY’17.

@ 2017 Bank of Baroda. All rights reserved

Please refer page No. 3 for disclaimer. India Macro Insight-BoP for Q3 of 2016-17
 3

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For further details about this publication, please contact

Prof. Biswa Swarup Misra

Chief Economist
Bank of Baroda
Phone:+9122 66985713
E-Mail: chief.economist@bankofbaorda.com
bs.misra@bankofbaroda.com

India Macro Insight-BoP for Q3 of 2016-17