Rupee may face pressure as current account deficit rises to a record

Current account deficit widens to $32.6 bn mainly on account of a larger trade deficit and moderation in net invisibles
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First Published: Thu, Mar 28 2013. 05 36 PM IST
While exports rose 0.5%, imports gained 9.4% on account of oil and gold demand in the quarter. Photo: Priyanka Parashar/Mint
While exports rose 0.5%, imports gained 9.4% on account of oil and gold demand in the quarter. Photo: Priyanka Parashar/Mint
Updated: Tue, Apr 02 2013. 11 09 PM IST
New Delhi: In a move that could put fresh pressure on the rupee, India’s external sector risks worsened after the Reserve Bank of India (RBI) reported a record current account deficit (CAD) of 6.7% of gross domestic product (GDP) in the third quarter of the current fiscal.
The steadily worsening balance of payments (BoP) outlook has been a central point of concern to not only RBI, but to the finance ministry as well. CAD is the sum of the trade deficit, exports less imports, and net invisibles such as accruals on account of software exports.
On Thursday, the finance ministry sought to put up a brave front. In a press statement issued late evening, it said, “Though this number is large, yet (it is) not surprising.”
The latest data shows that CAD widened to $32.6 billion mainly on account of a larger trade deficit and moderation in net invisibles. India’s total external debt stock stood at $376.3 billion at the end of December compared with $345.5 billion at the end of March. Of this, short-term debt was 24.4% at the end of December 2012 compared with 23.3% a year ago.
CAD was 5.4% of GDP in the preceding quarter, and 4.4% in the same period a year ago.
In the October-December quarter, while exports were up by only 0.5%, imports rose 9.4% on account of oil and gold imports in the quarter. This resulted in a trade deficit of $59.6 billion in the third quarter compared with $48.6 billion a year ago.
Anticipating a worsening CAD, the government has been working on incentivizing foreign capital inflows into the country. On the weekend, flagging CAD as a major concern, finance minister P. Chidambaram announced a rationalization in foreign investment limits in the government securities and corporate bond market by merging all existing sub-limits under two broad categories from 1 April. The finance minister also announced that new criteria based on these debt limits would be revised, a move that is expected to enhance foreign debt inflows.
Experts echoed similar sentiments.
The deficit is alarming, said Rajesh Chakrabarti, executive director at Bharti Institute of Public Policy, and a faculty member at the Indian School of Business.
“The current account deficit is becoming bigger and bigger. What is more worrying is the trajectory. For two consecutive quarters, the numbers have come in at more than 5% of GDP,” he said. “These numbers reflect that the rupee is becoming a weaker currency. It may in turn fuel gold purchases, which could again worsen the trade deficit. Spurring exports may be the only option left with the government since it has not been able to curb imports, especially gold.”
The government has been looking at ways to curb demand for unproductive imports such as gold to check the rising CAD. Though it raised custom duties on gold imports, demand has not moderated much.
The finance ministry statement hinted that fresh policy initiatives may be undertaken if the situation warranted. “Both RBI and the government will continue to monitor CAD and will take additional steps whenever warranted.”
The BoP data showed that CAD was financed through capital flows, and there was no drawdown on foreign exchange reserves. This was mainly on account of the surge in foreign portfolio investments, which rose to $8.6 billion from $1.8 billion in the year-ago period.
The government hopes that CAD will moderate in the fourth quarter of the current fiscal, on account of an improvement in exports and steadiness in imports. “CAD for the fourth quarter is expected to be smaller,” the finance ministry statement said.
The deficit is a reflection of India’s vulnerability in the external sector and a potential macroeconomic risk, said Naina Lal Kidwai, president of the Federation of Indian Chambers of Commerce and Industry, in a statement.
She expressed hope that Indian exports could see a recovery in the coming months “provided the external economic environment continues to improve and our government significantly steps up its efforts to support exports in the forthcoming foreign trade policy”.
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First Published: Thu, Mar 28 2013. 05 36 PM IST
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