The balance of payments (BoP) data for the June quarter are important because this was the quarter marked by foreign institutional investor outflows, and the numbers, therefore, answer the question: "How much is the BoP, and therefore the rupee, dependent on portfolio flows?"
Not much, as portfolio inflows were a mere $82 million during the quarter, compared with $3.7 billion in the fourth quarter of FY04.
At the same time, merchandise deficit rose from $4 billion in Q4, FY04, to $6.3 billion in the first quarter of FY05, the oil import bill being a big reason.
Although this gap was reduced substantially thanks to continued improvement in 'invisibles', the current account surplus fell to $1.9 billion from $3.4 billion in the previous quarter.
It's worth noting that, among invisibles, software exports were maintained at more or less the same level, and it was only private remittances that saved the day. Remittances rose to $5.1 billion from $3.2 billion in the previous quarter.
One not-so-good trend has been the substitution of portfolio inflows by debt inflows. Loans during Q1 went up to $2.8 billion, much of it short-term in nature, from a mere $221 million in the previous quarter.
NRI deposits fell by $786 million during the quarter, compared to a rise of $124 million during Q4, FY 2004. And finally, the upshot of a smaller current account surplus and lower foreign investment was a lower level of accretion to forex reserves.
Note that the current account surplus during Q1 was $1.9 billion, while remittances also increased by $1.9 billion. It's those NRIs slogging away in the Middle East and sending money home who are propping up the rupee.
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