 "CAD fears recede, fisc back in focus")
The rupee may have snapped its 5 day gaining spree but is off over 5% from it’s all time lows. Raghuram Rajan’s magic wand seems to have worked at least in the short run and the expectation is that the INR will inch up towards the 60 to the dollar mark in the coming days. Worries about the bloated CAD also seem to be subsiding with August trade data showing India’s trade deficit declining 23%, imports falling, exports rising 13% and gold demand constrained after the government raised duties in August. Official data on the current account deficit will be released this month end, but the consensus on the street seems to be that the gap will narrow.
Morgan Stanley expects the CAD to narrow to $12-13 bn or 2.7% of GDP annualized, while Crisil says the CAD will narrow to 3.9% due to government measures on curbing imports and an improvement in the global economy which could lift the rupee to the 60 levels.
Even as concerns on the CAD and the rupee ebb, the focus now seems to be shifting back to the government’s fiscal numbers. Speaking to CNBC, JP Morgan’s Asia Economist Sajid Chinoy says the major concern for the economy now is how the government manages its fisc. “If you get a sign of a reasonably large petrol price hike whether it is diesel, LPG or kerosene, it adds to the current sentiment which in conjunction with the RBI Governor's announcements and the pension bill shows there is finally some meaningful policy traction”, Chinoy said in an interview to the channel.
India’s fiscal deficit for the April-July period came in at 3.4 lakh crore rupees or 62.8% of the govt’s full year target while net tax receipts budgeted to grow at 19.1% grew only by 1.4% in the first four months.
Despite assurances from Finance Minister P Chidambaram, the huge outlay on the govt’s ambitious Food Security Bill has also raised concerns about the fiscal math going out of whack, raising fears of a soveregin downgrade. CLSA Chief Equity Strategist Chris Wood told another newspaper today that India runs the risk of a soveregin debt crisis and the passage of the Food Bill “hardly inspires confidence”.
All eyes are now on what the government does on pruning fuel subsidies. Reports suggest the Congress core group is expected to deliberate on a steep one time hike in diesel prices next week now that Congress President Sonia Gandhi is back after her medical trip to the United States.
There are also hopes that with the TRAI cutting spectrum prices, a renewed interest in the upcoming telecom auctions could bring in some much needed revenue for the government, helping bridge the fiscal shortfall.