Falling imports and crude prices boosted current account surplus

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Reserve Bank of India (RBI) recently reported that the Indian economy is set to register the current fiscal year with a current account surplus of 0.4% of GDP for the first time since the FY04. This is mainly due to the falling imports and crude prices, and aren’t driven by better exports.

As per the report within the second quarter(June) of FY19, the country earned a marginal current account surplus at 0.1% or $600 million as against a deficit of $4.6 billion or 0.7% of Gross Domestic Product (GDP). Also, for the fiscal year 2020, the Current Account Deficit (CAD) improved to 0.9% of GDP from 2.1% in FY19.

According to the RBI, in FY04, the country registered a current account surplus of  $10.6 billion which was 1.8% of GDP of that year.

Reserve Bank of India (RBI) states that the surplus was fundamentally due to reduced import/export deficit and an increase in net invisible receipts of $35.6 billion. Besides, net services receipts rose to $22 billion in the quarter and the private transfers rose to $20.6 billion i.e. by 14.8%.

Tanvee Gupta Jain, the house economist at UBS Securities India says that the poor domestic demand and decreased crude prices resulting in to fall in imports instead of improvement in exports lead to a surplus of 0.4% of GDP in FY21.

Also, revamped external position and the diminishing dollar have resulted in the rupee remaining at the range of 74.5-77 since at the end of March despite putting the economy into the deep recession. On a real effective exchange rate basis,  the rupee is trading past its equilibrium value, and its fair value should be in the 69-72 range. But an advantage for the rupee is high foreign exchange reserves at over $518 billion, which is the 5th largest in the world now, offering import cover for over 15 months.

At over $518 billion the reserves cover 86% of external debt. Import cover for reserves is over 15 months, much better than seven months in FY13 when the rupee was at its worst and for 14.4 months in FY08.

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