India’s 1QFY09 balance of payments played out, more or less, on expected lines. The current account deficit, at US$10.7bn. Notwithstanding a higher trade deficit and FII outflows, other flows continue to be strong. Beyond a robust FDI, invisibles actually surprised on the upside.
The disappointing news is that corporate external commercial borrowings slipped to a paltry US$1.6bn during 1QFY09 from US$7bn during 1QFY08. This reflected, in our view, the double whammy of tight credit conditions. Given that India lacks a local source of project finance, ECBs are critical to financing investment plans. External debt stagnated at US$221bn during the June 08 quarter.
Finally, expect the INR to regain ground in 2HFY09 with most of the adverse factors – risk aversion, oil, and USD strength – likely playing themselves out.
