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Assessment of Macroeconomic and Monetary Developments- Third Quarter Review 2005-06

Developments in the External Sector

Based on the trade data available from the Director General of Commercial Intelligence and Statistics (DGCI&S), merchandise export growth at 18.1 per cent in US dollar terms during April-December, 2005 slowed down from 26.6 per cent in the corresponding period of the previous year. The deceleration in export growth was due to a slowdown in exports of engineering goods, textiles and clothing, and gems and jewellery in an environment of strong domestic demand. The recent moderation of export growth points to the urgency of a supportive policy environment for strengthening export competitiveness such as the development of infrastructure and simplification of procedures.

Imports rose by 27.3 per cent as against 36.3 per cent a year ago. Oil imports recorded a growth of 45.3 per cent, marginally down from 45.7 per cent a year ago, mainly reflecting the softening of international crude prices with the ‘Indian basket’ edging down to US $ 55.1 per barrel in December. Both imports and consumption of petroleum products declined in volume terms. Non-oil imports increased by 20.2 per cent during April-December, 2005 on top of 32.9 per cent in the corresponding period last year. Non-oil non-gold imports rose by 30.8 per cent in April-October 2005 on top of 29.9 per cent a year ago. Imports of capital goods increased by 32.2 per cent (28.6 per cent a year ago), driven mainly by electrical and non-electrical machinery, transport equipment, project goods, metal manufactures and machine tools. Consequently, the overall trade deficit widened to US $ 29.8 billion, higher by 54.2 per cent than US $ 19.3 billion in the corresponding period of the previous year.

As per balance of payments (BoP) data, the trade deficit during April-September, 2005 widened to US $ 31.6 billion as compared with US $ 14.8 billion in April-September 2004. Invisible receipts rose by 53.0 per cent due to significant growth in receipts from transportation, software exports and other professional and business services. Private transfers, comprising primarily remittances from Indians working overseas, remained sizeable at US $ 12.3 billion as compared with US $ 10.2 billion in April-September 2004. Invisible payments grew sharply (71.0 per cent) on account of outbound tourist traffic, payments for transportation and business services such as business and management consultancy, engineering, technical and distribution services and dividend and profit payouts. As a result, the current account deficit was placed at US $ 13.0 billion in April-September 2005 as against US $ 0.5 billion in April-September 2004.

Capital flows remained buoyant in April-October, 2005. Foreign direct investment (FDI) picked up on sustained growth in industrial and service sector activity and the positive investment climate. FDI inflows amounted to US $ 3.6 billion in April-October, 2005 up from US $ 3.3 billion a year ago. Outward FDI also maintained the rising profile of recent years, reflecting the appetite of Indian companies for global expansion in terms of markets and resources. A turnaround in FII inflows that occurred in June continued through 2005, on the back of strong growth expectations and corporate performance. Portfolio flows rose to US $ 4.8 billion from US $ 1.3 billion, mainly on account of net investment by FIIs which went up to US $ 3.4 billion from US $ 1.1 billion. Portfolio investment by way of ADRs/GDRs also rose to US $ 1.4 billion from US $ 0.2 billion. Net inflows under the non-resident deposit schemes at US $ 231 million turned around during April-October, 2005 from net outflows of US $ 688 million during the corresponding period last year. Higher recourse to external commercial borrowings (ECBs) and short-term credit was enabled by lower spreads on external borrowings and rising import financing requirements.

India’s external debt rose by US $ 1.0 billion over end-March, 2005 to US $ 124.3 billion at the end of September, 2005. The increase was mainly in the form of ECBs and short-tem debt, attributable to financing requirements necessitated by the large expansion in both oil and non-oil imports. Accordingly, the ratio of short-term debt to total debt increased marginally from 6.1 per cent at the end of March 2005 to 6.7 per cent at the end of September 2005.

Net accretion to foreign exchange reserves during April-September, 2005 was US $ 6.5 billion (excluding valuation), taking the outstanding foreign exchange reserves to US $ 143.1 billion. Inclusive of valuation, India’s foreign exchange reserves declined by US $ 2.1 billion from US $ 141.5 billion at the end of March 2005 to US $ 139.4 billon as on January 13, 2006. Excluding the one-off impact of IMD redemptions, the foreign exchange reserves would have shown an increase of US $ 5.0 billion.

Orderly conditions prevailed in the Indian foreign exchange market with the rupee exhibiting more flexible two-way movements. Up to January 20, 2006 the rupee appreciated by 5.6 per cent against the euro, by 4.1 per cent against the pound sterling and by 5.4 per cent against the Japanese yen but depreciated by around 1.4 per cent against the US dollar.

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