India’s current a/c deficit narrows on record high software exports

India’s current account deficit (CAD) for 3QFY11 narrowed to US$9.7bn or 2.3% of GDP, against US$12.2bn or 3.5% of GDP a year earlier. Three key reasons behind the improvement in the current account deficit: One, the software services exports in 3QFY11 increased 14.6% to US$14.7bn, the highest ever in a quarter, against US$12.9bn a year ago. Two, workers’ remittances rose 5.2% to US$13.4bn in 3QFY11 from US$12.8bn in the year-ago quarter. Three, A US$2 bn delta came from the non-software services exports. Though the balance of non-software services exports in 3QFY11 were a drag (a US$2.6bn deficit), it has markedly improved from the US$4.7bn deficit of the year-earlier quarter.

On the capital account front, thinghs were not too rosy. The capital account surplus rose only marginally to US$14.9bn in 3QFY11, against US$14.6bn a year ago. While inflows under portfolio investment, external commercial borrowing (ECB) and banking capital gained some traction over 3QFY10, inflows under foreign direct investment (FDI) and short-term trade credits were subdued. Notably, the ECB inflows rose to US$3.6bn in 3QFY11, more than doubled from the same quarter a year earlier.

The current account deficit is likely to narrow further in 4QFY11 for two reasons: (a) high exports growth vs. imports resulting in narrowing of the merchandise trade deficit; (b) higher invisible surplus on buoyant software services exports and strong remittances. However, high international crude oil price, if persists, may pause a threat to the improvement in India’s current account balance. Therefore, the rupee is likely to be on the upward trajectory in the next two quarters. I expect rupee to reach around 43 per dollar by the end of June quarter.