Despite the recent policy measures, the current account deficit to GDP ratio will worsen to 4.1%, higher than the previous estimate of 3.6% by the year-end

Will the improvement in balance of payments (BoP) in the first quarter of the fiscal sustain? Not quite, according a Kotak Bank report titled “No joy yet”.  While recent policy steps have been in the right direction, there may not be significant improvement under the capital account immediately, the report says because the global risk conditions are still not conducive. While the BoP outturn is marginally positive at $0.5 billion for the first quarter of the current fiscal (1QFY13), this is not likely to sustain and by end-FY2013, the BoP deficit will be $8.4 billion. This is based on the anticipation of continuing drag on the CAD (current account deficit) from the net interest income outflows.

On the positive side, India has increased its capital account receipts to $66 billion (3.6% of GDP) compared to $58 billion (3.2% of GDP) based on the current momentum of the short-term trade credit, FII flows and banking capital flows (NRI deposits).

But Kotak cautions that the services sector inflows may not see large increases due to the global slowdown continuing. It is now estimated that the CAD/GDP for FY2013E at 4.1%, higher than the previous estimate of 3.6%. Contributing to the negative outlook on the interest income component, it is now expected that there will be a net outflow of $17 billion against the earlier estimate of $12 billion.

CAD improved in 1QFY13 at $16.6 billion (3.9% of GDP) against a deficit of $21.8 billion 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: (a) gold & silver imports came down by 47.5% year-on-year due to higher gold prices (including effect of customs duty increase) and the jewellers’ strike to protest against excise tax increases, (b) decline in the oil imports due to a sharp drop in the international crude oil prices, and (c) a moderation in non-oil non-gold imports.

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, according to the Kotak report.

Capital flows remained steady, according to the Kotak report. Overall capital flows for 1QFY13 were at $17 billion (4.0% of GDP) against $16.6 billion (3.4% of GDP) in the previous quarter. This was despite a sharp fall in the FII flows in 1QFY13 against $14 billion in 4QFY12. Equity flows in 4QFY12 had improved significantly.

The policy of the Reserve Bank of India (RBI) to enhance the debt limits in the G-sec and the corporate bond markets for the FIIs has 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.

Even as the BoP is in a marginal positive territory of $0.5 billion in 1QFY13, Kotak expects the BoP to remain in a stressed zone and produce a deficit of around $8.4 billion in FY2013E.