The inflows from foreign institutional investors (FIIs) in the second quarter (Q2) of 2010-11 were barely able to cover the trade deficit in the quarter, of $28.63 billion, revealed a back-of-the envelope calculation based on the government’s mid-year review. FIIs invested $22.9 billion (Rs 1.02 trillion) in Indian equities in Q2, figures for which have been taken till October 15.
The country was able to increase foreign exchange reserves due to a capital account surplus, led by increases in external commercial borrowings (ECBs) and foreign direct investments (FDIs) in the second quarter for 2010-11. Indian companies raised ECBs of $7.9 billion and attracted FDI of $10.3 billion (Rs 46,000 crore) in Q2 that helped rein in the trade deficit. Q1 saw Indian companies raise $2.7 billion in ECBs and $3.2 billion in FDI.
Contrary to perception, it was not just the spike in FII inflows that contributed to a stronger rupee. FDI and ECBs increased sharply in Q2, which saw the rupee appreciate 3.24 per cent in the last quarter, while it had depreciated 3.4 per cent in Q1.
India’s foreign exchange reserves increased by $13 billion in the first half of the financial year to touch $292.9 billion (Rs 13 trillion) by the end of September, revealed the government in a mid-year analysis released by the department of economic affairs, ministry of finance.
The increase in forex reserves was led by strong inflows from FIIs, who pumped in $27.5 billion (Rs 1.23 lakh crore) in Indian equities between April and October 15, against $18.4 billion during the same period last year. India had foreign exchange reserves of $279.1 billion at the end of March.
The current account deficit widened to $13.7 billion (Rs 61,000 crore) during the first quarter ended June, from $5.1 billion in Q1 of 2009. Howeve, this was easily financed through a surge in capital inflows, with FIIs alone investing $23.9 billion in Q1.
Imports way ahead
The deficit rose due to a widening trade balance on account of weak global demand (exports) and strong domestic demand (imports). During Q1 of 2010-11, exports on a balance of payments (BoP) basis increased 39 per cent to $53.7 bn, against $39.2 bn in Q1 of 2009-10. Imports were up 35.6 per cent, to $87 bn.
Yet, despite the higher growth in exports relative to imports, the trade deficit shot up 33.6 per cent to $34.2 bn in the first quarter of 2010-11, against $25.6 billion in Q1 of 2009-10.
Between April and September, the cumulative value of exports on customs basis (data on BoP basis not available beyond Q1) touched $103.65 bn against $80.95 bn in the same period last year, a growth of 28 per cent in dollar terms. Imports surged 29.9 per cent to $166.48 bn during the period.
Exports of software services grew 15.5 per cent to $12.7 bn during Q1 of 2010-11 as against a decline of 8.9 per cent during the same period last year. Trade body Nasscom estimates software exports to grow 13-15 per cent to $56-57 bn this financial year.
The capital account remained buoyant, as there was a surge in capital inflows, at $18.4 bn in Q1 of 2010-11 against $4 bn in Q1 of 2009-10. This was led by inflows under short-term credit, ECBs, external assistance and banking capital.
Between March 2009 and March 2010, the rupee appreciated 12.6 per cent against the dollar, mainly on account of weakening of the latter in international markets.
