India' capital account turns negative as BoP shoots up to 17.8 billion in Q3 FY09

India's capital account balance turned negative for the first time since the first quarter of fiscal 1998-99 due to net outflows under portfolio investment, banking capital and short-term trade credit while its current account deficit surged to the highest in 18 years in the quarter ended December 2008 as the global financial-cum-economic crisis stifled trade as well as capital inflows, the Reserve Bank of India (RBI) said on Tuesday.

RBI attributes this to a steady decline in exports and a growth in imports on a balance of payment basis, a decline in private transfer of receipts and net outflows under portfolio investment, banking capital and short-term trade credit.

According to the balance of payments (BoP) data released by the RBI, the capital account balance saw an outflow of $3.23 billion as against an inflow of $31.27 billion during the third quarter of last year.
 
The current account deficit widened to $14.64 billion in the October-December quarter from a revised $4.53 billion a year earlier, the central bank said. It was also much higher than the 12.83 billion deficit in the previous quarter.

The overall BoP - the country's external sector balance-sheet - witnessed a deficit of $17.8 billion compared to record surplus of $26.7 billion recorded in the corresponding period a year ago.

There was, however, a turnaround in the net inflows under the non-resident Indian (NRI) deposits in Q3 FY09 in the wake of the hike in interest rates on NRI deposits.

The foreign exchange reserves on a BoP basis (i.e., excluding valuation) declined due to widening of current account deficit combined with net outflows under the capital account, the RBI said. The largest decline in reserves during any one quarter ($4.7 billion) was last observed in Q3 FY06.

Growth in merchandise exports turned negative during the October-December quarter for the first time after 2001-02 due to the global economic slowdown, the central bank said. Import growth decelerated to single digit during Q3 FY09 after a gap of almost six years mainly due to lower crude oil prices and non-oil imports.

Since imports rose faster than exports during the period, the trade deficit has almost doubled.

Private transfer receipts declined only marginally during the quarter ended 31 December 2008 despite a slowdown in economic activities in the Gulf countries and in the advanced economies like the US and European countries, the RBI said.

Even with the deepening of the global economic crisis, software exports recorded a growth of around 12 per cent during Q3 FY09.

The biggest hit in the capital account came from portfolio outflows, which stood at $5.8 billion during the October-December period as against inflows of $14.85 billion during the year-ago period. While there were hardly any inflows by way of depository receipts, FIIs pulled out $5.8 billion during the third quarter of the current financial year versus inflows of $8.9 billion.

Similarly, there was an outflow in banking capital at nearly $6 billion as against inflows of $1.06 billion. Due to the global turmoil there was an impact on short-term trade credits, which saw an outgo of $3.14 billion during October-December compared to inflows of $4.13 billion last year.

FDI and external commercial borrowings (ECB) fell due to the adverse effects of the global financial meltdown. The gross capital inflows into India during the third quarter stood at $70 billion as against inflows of $127.3 billion in the same quarter of FY08. Capital outflows were $73.6 billion.