In a move that could put fresh pressure on the rupee, India’s external sector risks worsened after the Reserve Bank of India (RBI) reported a record current account deficit (CAD) of 6.7% of gross domestic product (GDP) in the third quarter of the current fiscal.The steadily worsening balance of payments (BoP) outlook has been a central point of concern to not only RBI, but to the finance ministry as well. CAD is the sum of the trade deficit, exports less imports, and net invisibles such as accruals on account of software exports.
CAD widened to $32.6 billion mainly on account of a larger trade deficit and moderation in net invisibles. India’s total external debt stock stood at $376.3 billion at the end of December compared with $345.5 billion at the end of March. Of this, short-term debt was 24.4% at the end of December 2012 compared with 23.3% a year ago.
CAD was 5.4% of GDP in the preceding quarter, and 4.4% in the same period a year ago. CAD or Current Account Deficit is the sum of the balance of trade (i.e., net revenue on exports minus payments for imports), factor income (earnings on foreign investments minus payments made to foreign investors) and cash transfers.
In simplistic terms it means it is the sum total of Exports-Imports-Loan Repayments or FII outflows+remittances from NRIs.
A couple of years ago a CAD at 3% of GDP was considered high but now it is at 6.7%in the 3rd Quarter. It is expected to improve marginally in the 4th quarter due to better export figures but the problem is that as a percentage of the GDP with the denominator sinking the CAD percentage may not go down.
