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Awash with foreign funds

The Reserve Bank of India’s preliminary balance of payments (BOP) data for the first six months of the year do not reveal any significant departure from certain well documented trends in the external sector. The impact of the strengthening rupee is once again seen in the decelerating merchandise exports. Compared with a more than 25 per cent growth during April-September 2006, their growth has been 19.9 per cent in the corresponding period this year. There is a growing clamour for expanding the range of export sops. The larger debate over policy measures to moderate the rupee’s rise, however, remains inconclusive. Merchandise imports, on the other hand, have grown by 21.9 per cent, compared to 24.7 per cent during the same period last year. Oil imports have grown at a sharply lower rate, almost certainly due to the fact that global oil prices were at that time well below today’s unprecedented levels. However there has been a spurt in the import mainly of export-related items and gold and silver. The trade deficit has widened to $42.4 billion, a jump of $8.7 billion. Invisible receipts have increased at a much slower pace mainly on account of a deceleration in the exports of both software and business services. This ominous development is once again partly attributable to the strong rupee and its impact on the margins of leading software exporters. However, remittances from Indians working abroad, which form part of private transfers, were higher at $19 billion, up from $12.7 billion. That has been the main factor behind the higher invisible surplus, which at $31.8 billion is $8.3 billion more than last year’s corresponding figure.

As a result of the growth in invisibles, the current account deficit was only marginally higher, at $10.7 billion. As in earlier years, it is the aggregate of net capital flows that has propped up the balance of payments, and this time the increase is very substantial — over $31 billion — and it covered almost all categories. Net foreign direct investment has been higher by $2.6 billion. Portfolio investment has jumped more than 11 times to $18 billion, a development clearly corroborated by the rising stock markets. Only in one category, NRI deposits, there has been a net outflow, reflecting lower deposit rates. Curiously, other government disincentives to check unbridled external commercial borrowings have not borne fruit. Capital flows in this category have almost doubled. The BOP data reinforce the point that rupee appreciation and checking the unprecedented levels of capital flows will remain the key concerns of monetary and fiscal policies.

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