If this trend had persisted, even the significant widening of the current account deficit should not have been a source of concern and dealing with the reserve accumulation would have remained the policy challenge. That is no longer the case. For, the second change of the past few months is that the capital account scenario looks very different from what it did last year. The sharp decline in the stock market in the past few weeks is reflective of large exits by foreign investors. This has reversed the direction of the rupee's movement, which until recently was headed nowhere but up. Recent developments have pushed it firmly lower, taking it to lower than where it was when the great appreciation began in March 2007. Notwithstanding the other consequences of this reversal, it should make exporters happy. Unfortunately for them, though, the May numbers for exports indicate that sluggish global demand has more than offset the competitive benefits of a depreciating currency. Exports grew by a mere 13 per cent in dollar terms, considerably below the 35 per cent rate of growth in April. Imports, on the other hand, grew by 27 per cent, to which oil was a significant contributor with imports growing by over 50 per cent from May 2007. As a result, the trade deficit came in at $10.8 billion, taking the two-month deficit to $20.6 billion, nearly 50 per cent higher than the $13.9 billion in April-May 2007.
With the trade deficit widening on account of sluggish exports and buoyant imports, and capital exiting the country, the BoP has begun to tilt in the opposite direction. Exports of services may continue to provide a cushion, but they too are vulnerable to a US and global slowdown. Remittances are another big contributor and should remain healthy, particularly from West Asia, but it does appear that the global situation is beginning to tell on India's BoP. Of course, the $300 billion reserves do provide considerable cushion, giving the government enough time to deal with the macro-economic situation in its entirety. The longer this response is delayed, the greater the likelihood of the BoP adding yet another vulnerability to an already complex situation.