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New Delhi: India faces growing strain to fund the widest current-account deficit in major Asian countries after the rupee slid to an all-time low on concern the US will curb monetary stimulus as its economy improves.

The deficit narrowed to $21 billion last quarter, from $32.6 billion or a record 6.7% of gross domestic product (GDP) in October to December, the median of nine estimates shows in a Bloomberg News survey before data due on Friday. The Reserve Bank of India (RBI) estimates the sustainable level at 2.5% of GDP.

The rupee touched the weakest level versus the dollar on 20 June after Federal Reserve Chairman Ben S. Bernanke said the US central bank will probably taper bond purchases this year if the American economy performs as it projects. The potential for reduced stimulus exposes emerging nations from India to Indonesia and Brazil to the risk of capital outflows.

“The prospect of the US unwinding stimulus means that funding the shortfall will get more challenging," said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai. “Even if the deficit narrows, it will remain too high for comfort."

The rupee depreciated 2.9% last week and touched an all-time low of 59.98 per dollar. The BSE Sensex index retreated 2.1%, while the yield on the 8.15% government bond due June 2022 rose to 7.62% from 7.53%.

The currency’s 8.4% tumble this quarter is the worst in Asia, according to data compiled by Bloomberg. India is prepared to take action to reduce volatility as needed, Raghuram Rajan, the top adviser in the finance ministry, said on 20 June.

Biggest risk

The imbalance in the current account, the broadest gauge of trade, is the biggest risk to an economy that grew a decade-low 5% in the year ended March, according to RBI.

Foreign-direct investment in India fell the most in more than a decade last fiscal year, increasing reliance on stock and bond inflows to fund the shortfall.

Overseas investors have sold a net $2.1 billion of Indian bonds and bought a net $4.2 billion of stocks so far this quarter. That’s less than first-quarter fixed-income purchases of $2.3 billion and share inflows of $10.2 billion.

Imports of gold and crude oil, and subdued exports amid an uneven global recovery, have stoked India’s current-account gap.

The International Monetary Fund (IMF) estimates the shortfall at 4.9% of GDP this year, compared with 3.3% in Indonesia and a surplus of 2.6% in China. India’s imbalance is the widest in Asian economies with GDP exceeding $100 billion, the data shows.

Dollar strength

While the deficit is expected to narrow gradually this year, the combination of rising US yields and the potential rise of the dollar will mean that India will continue to face funding risks, said Chetan Ahya, an economist at Morgan Stanley in Hong Kong.

India has boosted taxes on gold imports to tackle the current-account gap.

The government is also considering easing restrictions on foreign-direct investment in a range of industries to woo capital, according to finance minister P. Chidambaram.

Those steps are part of a nine-month policy push by Prime Minister Manmohan Singh’s administration to bolster growth and avert a credit-rating downgrade.

Other measures have included paring the budget deficit, loosening foreign-investment rules in the retail and aviation industries and easing caps and levies on purchases of local bonds by overseas investors.

Foreign reserves

The trade deficit in the 12 months ending March 2014 should be lower than last year as gold imports moderate, commerce secretary S.R. Rao said in an 18 June interview.

RBI left interest rates unchanged this month, snapping three straight reductions, and said inflation, growth and the balance of payments will determine monetary policy.

Currency reserves stood at $290.7 billion as of 14 June, RBI data show, about 9.4% lower than an all-time high of $321 billion in 2011. They provide a cushion against shocks, Fitch Ratings said on 12 June, when it boosted the outlook on India’s sovereign rating to stable from negative.

Still, sustained intervention to steady the rupee amid the high current-account imbalance is a challenge as it depletes reserves, according to Yes Bank Ltd.

India’s current-account deficit reflects lopsided economic management that failed to address supply issues, said Arun Singh, an economist at Dun and Bradstreet Information Services India Pvt. in Mumbai. It will take some more time before calm returns.

Elsewhere in Asia today, Taiwan’s unemployment rate in May was unchanged from April, while Vietnam and Singapore will release inflation data. A report may show German business confidence increased in June, while the Dallas Fed will release its index of Texas manufacturing activity.

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