India's merchandise trade deficit stands pat at US$16b per month

It makes up 10% of GDP.

According to DBS, with the FY12/13 current account deficit on course to reach a record high above 5.0%, any help in financing the shortfall is positive.

However, this alone is unlikely to bring significant relief. To put things in context, the foreign investors’ limits in government debt stands at USD 25bn, less than 1.5% of GDP, with the cumulative FII debt threshold at 4.0%.

This is dwarfed by the merchandise trade deficit, which has averaged USD 16bn per month for the last two fiscal years, making up 10% of GDP in FY11/12.

Here's more from DBS:

The scope for the FII debt investments to increase substantially is also restrained by the government’s plans to limit the annual enhancement of the sovereign debt limit to 5% of the yearly borrowing of the government.

That said a guarded approach in this regard is necessary and prudent in light of the high fiscal deficit levels and subsequent need for a stable debt market.

With a significant part of the government bond issuance already enjoying a captive status with the domestic lenders, the sense of urgency is also limited.

Thereby the reliance on portfolio equity inflows will continue in the immediate term, though a shift towards non-debt creating and stable foreign direct investments should remain the priority in the medium-term.

In this respect, recent indications that the varying FDI sectoral caps could be scrapped and rationalised are positive, though parliamentary roadblocks could make implementation an uphill task.