Wider current account deficit, lower financial flows depleted forex in the second quarter

Merchandise exports fell in the second quarter of this fiscal sequentially given weakening demand abroad, while merchandise imports continued to rise on domestic demand, leading to an increase in merchandise trade deficit.

Deficit in the primary income account, too, widened during the quarter. As a result, current account deficit (CAD) shot up to a 37-quarter high of 4.4% of gross domestic product (GDP)¹ in the second quarter from 2.2% (revised down from 2.8% earlier) in the first quarter of this fiscal and 1.3% in the year ago quarter.

A surplus in services and secondary income accounts (owing to increased remittances) prevented CAD from deteriorating further.

Foreign exchange reserves declined as inflows under the financial and capital account were insufficient to cover the shortfall in the current account. Within the financial account, while net foreign portfolio investments (FPI) turned positive in the second quarter (after remaining negative in the first), foreign direct investments (FDI) declined sharply and other investments (mainly banking capital) saw net outflows as opposed to high net inflows in the previous quarter. Therefore, overall, financial flows were not only lower on-quarter, but were also inadequate to fund the shortfall in the current account.

¹ CAD was recorded at 4.7% of GDP in the first quarter of fiscal 2013