{LONGTERMINVESTORS} Fwd: India: Portfolio outflows weighed on BoP

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From: <research@icicibank.com>
Date: Tue, Dec 22, 2015 at 10:57 PM
Subject: India: Portfolio outflows weighed on BoP
To: stockdesai@gmail.com

India CAD came in at 1.6% of GDP in Q2 FY2016, higher on a sequential basis but lower as compared to same period last year Foreign investment remained muted despite strong FDI flows. Portfolio segment witnessed an outflow amid volatile global environment We maintain our expectation of a USD 25 bn CAD (~1.1% of the GDP) for FY2016. Weakness in exports and volatility in the FII flows remain key risks in the near term Overall external sector outlook remains comfortable India's current account deficit for Q2 FY2016 widened to 1.6% of GDP as compared to the previous print of 1.2%. However, the outturn narrowed as compared to the same period last year. Wider trade deficit led to the higher CAD during the quarter. External environment remained challenging as exports and imports contracted by 18.7% YoY and 14.4% YoY respectively in Q2 FY2016. Global headwinds, in terms of lower demand and the steep decline in commodity prices are weighing on India's external sector performance. Invisibles witnessed a slight improvement as compared to the previous quarter (Q1 FY2016) but were lower as compared to the same quarter last year (Q2 FY2015). On a YoY basis, net services receipts moderated marginally, largely due to fall in export receipts in transport, insurance and pension services. Meanwhile transfers remained strong at USD 16.3 bn in Q2 FY2016 and the fear of lower remittances from oil producing regions has not materialized. Strong FDI flows takes up the slack from weak FII and loans The capital flows for Q2 FY2016 was significantly lower than the previous few quarters: Net FII flows clocked an outflow of USD 6.4 bn in Q2 FY2016 as compared to an outflow of USD 2.3 bn in Q1 FY2016 and strong inflows of USD 9.8 bn in Q1 FY2015. The uncertainty surrounding the Fed rate hike had weighed on the capital flows across EM economies and India was not immune to the trend. The loans component showed a decline for the second consecutive quarter. However, FDI trend remained strong at USD 6.6 bn in Q2FY2016, though lower as compared to the previous quarter. The Government's effort to attract FDI inflows through reform measures is supporting the flows. BoP posted a deficit after a gap of seven quarters Lower FDI inflows, FII outflows and slightly wider CAD has pushed the BoP into deficit territory. Despite BoP deficit in Q2 FY2016, we believe that the economy is poised to achieve overall BoP surplus in FY2016. The sustainability of the external sector improvement still not cemented Although the external sector performance remains favourable, the sustainability of the same is still not confirmed. Continued weakness in exports performance constitute potential headwind for the sector. Though improving domestic competitiveness through structural reforms is crucial to improve exports performance, we believe it can only materialize in the medium term. In the near term, a weaker Rupee can act as a catalyst to revive competitiveness. Nevertheless, record high FX reserves provides cushion to address (any) increase in global volatility going forward. Please refer to the attached document for a detailed report. Regards, Samir Tripathi +91-22-4008-7233 ​

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CA. Rajesh Desai

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