RBI records its largest-ever current account surplus — but that’s not necessarily a good thing

RBI records its largest-ever current account surplus — but that’s not necessarily a good thing
Reserve Bank of India records largest-ever current account surplusBCCL
  • The Reserve Bank of India (RBI) recorded its largest-ever current account surplus during the first quarter of the current financial year.
  • The surplus is mostly on account of imports shrinking more than exports in three months between April to June.
  • Even the boost to India’s foreign exchange reserves (FOREX) to $27.9 billion was due to the depreciation of the US Dollar and an increase in gold prices.
More money in the bank is usually regarded as a positive sign to look forward to, but for the Reserve Bank of India (RBI), this large surplus in the June quarter may not reflect the best tidings.

India’s apex banking institution recorded its largest current account surplus at $19.8 billion that accounts for 3.9% of the GDP. That being said, the GDP fell by 23% in the first quarter.

RBI records its largest-ever current account surplus — but that’s not necessarily a good thing
RBI's current account status over the last five quartersRBI/BI India

“The current account surplus itself is not really a surprise. What is surprising is that the trade deficit didn’t come down as sharply as expected,” Madan Sabnavis, the chief economist at CARE Ratings, told Business Insider.

According to him, there has, in fact, been a marginal decline when it comes to invisibles of the current account — remittance and software. “Earlier we had a situation where the deficit was high but the invisibles were toning it down,” Sabnavis explained.

Import and export of goods takes a hit — could be temporary
For the RBI, between April to June, most of the surplus in its kitty is on account of faltering trade. “The merchandise trade deficit shrunk to just $10 billion in Q1 FY2021, most of which was accounted for by the net oil balance,” said Aditi Nayar, the Principal Economist at ICRA.

Major items in the Current AccountApril-June 2020April-June 2019
Imported goods$62.3 billion$129.5 billion
Exports goods$52.3 billion$82.7 billion
Imported services$26.3 billion$52.2 billion
Exported services$46.8 billion$32.1 billion
Primary Income credited$5.1 billion$5.8 billion
Primary Income debited$12.8 billion$12.1 billion
Secondary Income credited$18.2 billion$20 billion
Secondary Income debited$1.2 billion$2 billion
Source: RBI

Madan believes the relief is only temporary. These numbers only account for what has happened up until June. Since then the unlock has commenced, oil consumption has started increasing and factories are running again.

“ICRA expects merchandise imports to stage a relatively faster recovery in H2 FY2021, with the economy slowly grinding to a new normal, the stabilisation in commodity prices and relatively sticky demand for gold closer to the festive and marriage season,” forecasts Nayar.

Following the data release for Q1, ICRA has revised its expectation of the size of India’s current account balance in FY2021 to $35 billion or around 1.4% of GDP.

What is a current account surplus?
The current account can either be in surplus or deficit depending on the inflow and outflow of money from the country in the form of remittances, goods, services and other movement of assets.

Normally, a surplus in a country’s current account is considered a positive sign if it is a result of scaling down expenditure on imports or increasing earnings from exports. On the flip side, current account surpluses can also be a signal of recession setting in when domestic demand dips, imports are curbed and the currency is depreciated.

Analysts believe that even though the surplus is not necessarily a signal of recession, it’s not much to celebrate either since this is likely to be temporary.

Lakshmi Vilas Bank is down nearly 5% as concerns over Clix Capital merger deepen

Airtel launches new cybersecurity product with CISCO, Radware, VMware, and Forcepoint for enterprises — it took ₹100 crore and over a year to set up

Babri Masjid demolition case: CBI Special Court acquits all accused, judge says ‘demolition was not pre-planned’