Current account deficit narrows - RBI

Contraction in trade deficit helps, says RBI

India’s current account deficit (CAD) narrowed sharply to $7.8 billion (1.7 per cent of gross domestic product) in the first quarter of 2014-15 from $21.8 billion (4.8 per cent of GDP) in the year ago period. However, it was higher than $1.2 billion (0.2 per cent of GDP) in Q4 of 2013-14. “The lower CAD was primarily on account of a contraction in trade deficit contributed by both a rise in exports and a decline in imports,” said the Reserve Bank of India (RBI) in a press release on Monday.

On a Balance of Payments (BoP) basis, merchandise exports, at $81.7 billion, increased by 10.6 per cent in the first quarter of 2014-15 as against a decline of 1.5 per cent in the first quarter of 2013-14. On the other hand, merchandise imports, at $116.4 billion, moderated by 6.5 per cent as against an increase of 4.7 per cent.

The decline in imports was primarily led by a steep drop of 57.2 per cent in gold imports, which amounted to $7 billion, significantly lower than $16.5 billion. “Notably,” said the RBI, “non-gold imports recorded a modest rise of 1.3 per cent as against a decline of 0.6 per cent in the corresponding quarter of last year reflecting some revival in economic activity.” As a result, merchandise trade deficit (BoP basis) contracted by about 31.4 per cent to $34.6 billion in the first quarter of 2014-15 from $50.5 billion in the corresponding quarter a year ago. Net services receipts improved marginally on account of higher exports of services. Net services at $17.1 billion recorded a growth of 1.2 per cent in the first quarter of 2014-15.

However, net outflow on account of primary income (profit, dividend and interest) amounting to $6.7 billion was higher than that of $4.8 billion in the first quarter of 2013-14 as well as in the preceding quarter ($6.4 billion).

In the first quarter of 2014-15, gross private transfer receipts at $17.5 billion, however, were marginally lower compared with the corresponding quarter of 2013-14. In fact, the RBI said that in the first quarter of 2013-14, “private transfers had shown a significant increase of around 6 per cent over the preceding quarter, possibly responding positively to the rupee depreciation.” Foreign direct investment (FDI) and portfolio investment on a net basis recorded inflows.

While net inflow, on account of portfolio investment, was $12.4 billion as against an outflow of $0.2 billion, net FDI inflow was substantially higher at $8.2 billion ($6.5 billion).

The RBI said that loans (net) availed by deposit-taking corporations (commercial banks) witnessed an outflow of $2.6 billion “owing to higher repayments of overseas borrowings and a build-up of their overseas foreign currency assets.” Under currency and deposits, net inflows of NRI deposits amounted to $2.4 billion from $5.5 billion.

The amount of loans (net) of other sectors (external commercial borrowings) at $1.7 billion was much higher than $0.9 billion in Q1 of 2013-14. The RBI also said that there was a net accretion of $11.2 billion to India’s foreign exchange reserves in Q1 2014-15 as against a drawdown of $0.3 billion in the year ago period.

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RBI norms on Basel III instruments are credit positive: Moody's

The new norms by RBI for the instruments compliant under Basel III to raise Tier-I capital are credit positive for Indian banks, in particular public sector banks, according to Moody’s credit rating agency.

“They will make the instruments more attractive to investors, broaden the investor base for additional Tier 1 (AT1) securities to include retail investors and allow banks to have a higher proportion of AT1 capital in their Tier 1 capital,” Moody’s said in its credit outlook report.

New guidelines

On September 1, the Reserve Bank of India (RBI) had revised some of its rules governing instruments that qualify as bank capital under Basel III.

RBI has cut the minimum maturity for Tier 2 capital that banks can issue to five years from 10 years. It has also allowed retail investors to buy Tier 1 capital.

Basel III capital norms

Indian banks have to comply with Basel III capital norms by March 2019, including maintaining a minimum capital adequacy ratio of 11.5 per cent.

“Several changes will make AT1 instruments more attractive to investors. Write-downs of principal when a bank’s common equity Tier 1 (CET1) capital breaches the trigger level can now be temporary, giving investors the possibility of recouping their losses if the health of the bank improves,” said Srikanth Vadlamani, Vice President - Senior Analyst, Financial Institutions Group, Moody's Investors.

Broader investor base

Further, lack of broader investor base discourages banks from issuing Tier 2 instruments. RBI has tried to address this by widening the investor base to include retail investors.

The other key change in the new rules is the removal of certain limit on the amount of AT1 that a bank can use for calculating its Tier 1 capital, which effectively limited AT1 issuance to 1.5 per cent of risk-weighted assets.

At a time, when public-sector banks are finding it difficult to raise equity capital from the public markets, this provides a way for banks to bolster their Tier 1 ratio by raising a higher amount of AT1 capital.

Low capital levels are a key credit weakness for many Indian banks, particularly public sector banks. 

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