The rupee will slide to 70 to the USD if RBI hikes rates
CAD hits record high of 4.8% in FY'13, but better than market expectation

Economy Jun 27, 2013

Why a lower current account deficit will not save rupee

By Firstbiz Staff

India's current account deficit improved to 3.6% of the country's gross domestic product in the first quarter of 2013 at $18.2 billion against a historic high of 6.7 percent of the GDP in the fourth quarter of 2012, but totalled a record 4.8 percent for the full 2012-13 fiscal.

"CAD moderated sharply to 3.6 percent of GDP in Q4 of 2012-13 from a historically high level of 6.7 per cent of GDP in Q3 of 2012-13 as trade deficit narrowed," RBI said on Thursday. The moderation in CAD was due to non-oil and non-gold imports falling due to slowing economic growth.

"Essentially non-oil, no-gold components of imports showed a decline, reflecting slowdown in domestic economic activity," the Reserve Bank of added.



Brokerage Nomura has said the improvement is largely seasonal but it also reflects a lower-than-expected trade deficit.

For FY13 (year ending March 2013), the current account deficit stood at a historic high of 4.8% of GDP, up from 4.2% in FY12.

"We expect the overall current account deficit to moderate to 4.3% of GDP in FY14, as lower gold imports and lower commodity prices likely more than offset the impact of rupee depreciation. However, in our view, financing the current account deficit this year will be the key challenge, as not only are there risks from lower portfolio inflows, but debt inflows such as short-term trade credit also suggest caution. Therefore, overall, we expect lower capital inflows to offset any benefit from a lower current account deficit, which will maintain upward pressure on USD/INR," said Nomura analyst Sonal Verma .

While analysts expect the current account deficit in the current year ending March 2014 to narrow, a beaten-down rupee may keep foreign investors wary and weigh on the current account gap.

The current account data was released a day ahead of schedule and a day after the Indian rupee touched a record low of 60.76 to the dollar According to Verma, the release of the balance of payments data two days ahead of schedule suggests that the RBI is trying to calm markets.

Even Jyotinder Kaur, economist at HDFC Bank, believes that there was a clear motivation on the part of the RBI to put the market at ease.

"It shows they were uncomfortable at the recent sell-off, and perhaps, this is the best way to combat that," Kaur told Reuters.

The current account gap for the full fiscal year ending in March was $87.8 billion, compared with $78.2 billion a year earlier.

The biggest threat to India as of now is the rise in short-term debt which is concentrated in a few sectors only. Add that the vast difference between Indian exports and imports.

As Firstpost said earlier, "In May 2013, Indian exports fell by 1.1% to $24.51 billion. This meant that India had a trade deficit (or the difference between imports and exports) of more than $20 billion. The broader point is that India is not exporting enough to earn a sufficient amount of dollars to pay for its imports."

According to a report in the Economic Times, the import cover of foreign exchange reserves is now down to 6.5 months from 15 months in May 2008, when the economy was booming, capital flows were robust and the currency was strong.

"And unlike in the earlier decades, the composition of this debt has changed with greater borrowings by Indian firms as concessional forms of debt such as borrowings from multilateral institutions like the World Bank and bilateral credit have tapered off. It also comes at a time when India is facing a major challenge in boosting exports and accretion of foreign exchange reserves."

Christopher Wood, Equity Strategist ,CLSA, in an interview with CNBC-TV18 also points out that there has been no evidence of an accelerating investment cycle in India.

"If one hasn't got an investment cycle going, the growth stories are not strong and therefore there is more risk aversion when you have a risk off trade globally. However, this time around it is less of India specific move than a global move," said Wood.

With inputs from Reuters

by Firstbiz Staff

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