Ever since the economic reforms program initiated in 1991, India's performance on the external trade front has been phenomenal. Especially, during the last few years, strong foreign exchange reserves and capital inflows have positioned India as externally resilient and a preferred destination for foreign investments. However, in recent months, the global financial crisis has taken a toll on the country's foreign trade and inflow of foreign investments. The Balance of Payment (BoP) figures released by the central bank, particularly, portrays a grim outlook for India's external sector. According to quick estimates by the Reserve Bank of India, the Current Account Deficit (CAD)—difference between exports and imports of goods and services—widened to $119.4 bn in 2008-09, compared to $89 bn in the previous year. The third quarter of 2008-09 has turned out to be particularly nasty for both trade and investments. India's CAD recorded $14.6 bn during the period, making it the highest quarterly deficit since 1990. The capital account also recorded a deficit of $3.68 bn during the period for the first time since the first quarter of 1998-99.

The combined impact of widening current account deficit and net capital outflows led to a deficit of $17.88 bn in the overall balance of payments during the third quarter of 2008-09, compared to the record surplus of $26.7 bn during the same period of last fiscal. This also means that the country's forex reserves depleted by the same amount during this period. Some analysts are of the view that though India's current account was in deficit for many years, the net inflows of capital were sufficient enough to finance the current account deficit. However, this fiscal's figures create doubts whether this trend can be continued. They view that further deterioration of this situation would cost the economy severely by putting pressure on the rupee and reducing India's attractiveness to the prospective foreign investors. This could have implications for all asset classes including equities in India. They say that this situation reminds them of the BoP crisis of the 1990s.

The Analyst Magazine, Balance of Payment, BoP, Current Account Deficit, CAD, Foreign Investment Inflows, Foreign Direct Investments, Portfolio Investments, Emerging Markets, Indian Economy, BoP Crisis, Global Markets, Global Financial Crisis, Business Services, Financial Markets, Gross Domestic Product, GDP, External Commercial Borrowing, ECB, Fiscal Management.