Indias current account posted a marginal deficit of USD0.3b (or 0.1% of GDP), as against market consensus of a surplus of USD2b (or 0.4% of GDP) and our expectations of a surplus of USD4b (or 0.7% of GDP). Accordingly, current account deficit (CAD) was 1.1% of GDP in FY16, slightly better than 1.3% in FY15.

Although  merchandise  deficit  narrowed,  as  expected,  to  its  7-year  lowest  level  in  4QFY16,  the  lower  surplus  on  invisibles (services and income) kept current account surplus elusive.

Further,  capital  (or  financial)  inflows  also  slowed  to  the  10-quarter  lowest  level  of  USD3.4b  in  4QFY16.  While  foreign  direct  investment  (FDI)  was  strong  at  USD8.8b,  sharp  outflows  on  account  of  portfolio  investment  and  banking  loans  reduced net capital flows in 4QFY16.

Overall,  a  deficit,  albeit  marginal,  came  as  a  surprise  to  us.  As  we  have  argued  in  our  detailed  report,  we  believe  that  the adjustment in CAD has been sub-optimal and it must narrow further to create the potential for investment rate to pick up substantially. We now believe that current account could post a surplus in 1QFY17.