Profit repatriation, ECB interest hit 2% of GDP

The flip side of this, however, is that total investment outflows from India — that includes repatriation of profits, interest payments on government bonds and on ECBs — approached nearly 2% of GDP in Q2 FY13, representing a big part of India's total current account deficit (CAD). Given the Q2 FY13 CAD of 5.4% of GDP, this means such investment outflows formed nearly a third of the deficit.

This overall investment outflow number was 1.6% of GDP in Q1 FY13 and 1.4% for most of FY12.

While repatriation of profits, primarily, was $3.8 billion in Q2 FY13, repatriation of interest income on government and other bond holdings of FIIs added up to another $1.4 billion in Q2 FY13, up 40% from that in Q1 FY13.

Interest payments on ECBs as well as on short-term trade credit, added up to another $2.6 billion in Q2 FY13, a figure roughly the same as in Q1.

According to JPMorgan's economists, the numbers aren't particularly surprising since the stock of ECBs, for instance, has shot up 40% over the last two to three years. More generally, a JPMorgan note points out, "the upshot of the sharp increase in the CAD… is that more international capital will be needed to finance them. In turn, repatriation of profits and interest from the fast-increased stock of capital is expected to constitute a meaningful drag to the current account in the quarters and years to come, likely offsetting some of the benefits of reduced gold imports."

Based on the way the outflow position looks, and the latest current account deficit of 5.4% for Q2 FY13, JP Morgan estimates the full-year CAD at 4.2% of GDP, up from the 3.8% forecast earlier.

Despite the sharp surge in forex flows, the widening CAD has meant the rupee has actually depreciated from its levels at the beginning of the quarter. In short, even a small dip in inflows can cause sharp volatility in the rupee.

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