Current account deficit belies fears

Deficit in 2005-06 nearly doubled to $10.61 bn, yet remained sharply lower than estimates.

India's current account deficit in 2005-06 was sharply lower than feared, even as it nearly doubled to $10.61 billion "" the highest since the country embarked on economic reforms in 1991 "" from $5.4 billion a year earlier.

The prime minister's Economic Advisory Council, in February 2006, had estimated that the current account deficit in 2005-06 would be 2.9 per cent of the GDP, and had expected it to worsen to 3.1 per cent in 2006-07.

A current account surplus of $1.81 billion in the fourth quarter helped belie fears of the current account deficit deteriorating to nearly 3 per cent of the GDP. The current account deficit for 2005-06 was about 1.36 per cent of the GDP.

The lower-than-expected current account deficit is seen as a positive sign for the rupee, which gained sharply to close at 46.05 to a dollar today, against yesterday's close of 46.30.

"The current account deficit figures are better than the market had anticipated," said Srinivasan Varadarajan, managing director and head of markets-fixed income at JP Morgan. He, however, pointed out that the rise in the rupee today was more because of a weak dollar overseas.

A sharp rise in global oil prices and increase in non-oil merchandise imports had expanded the trade deficit to $51.55 billion in 2005-06 from $36.62 billion.

The current account turned around in the fourth quarter of 2005-06, after three quarters of deficits of $3.55 billion, $5.04 billion and $3.82 billion.

The merchandise trade deficit in January-March 2006 was offset by inflows of invisibles, particularly earnings from software exports and remittances from Indians working overseas.

The overall balance-of-payments surplus narrowed to $15.05 in 2005-06 from $26.15 billion a year earlier.

The balance-of-payments surplus in the January-March quarter was $13.22 billion, compared with a deficit of $4.67 billion in October-December 2005, helped by a surge in foreign capital flows, especially portfolio investment, data released by the Reserve Bank of India (RBI) revealed.