Early news is good news

But problems linked to CAD haven't gone away

It is entirely understandable that the Reserve Bank of India was eager to publish the current account deficit data for the July-September quarter of the current year to provide reassurance to the currency markets. In fact, the publication date was brought forward by almost a month, compared to the previous occasion, when it was merely a day earlier. Of course, amending schedules to soothe markets also has a flip side. If RBI does not publish the next quarter's data on March 2 or earlier, the markets may very well take this as a sign of bad news and react accordingly. This raises the larger question about the capacity of the system to release this data with less than a quarter's lag. If the capacity existed, why was this practice not begun earlier? It is best for markets if sensitive data, whether they convey good news or bad news, are published on a calendar, but with the shortest possible lag. Hopefully, this move signals a permanent shift to a two-month lag on balance of payments data from the earlier practice of a quarter.

This having been said, the news was undoubtedly good and should strongly reinforce the perception of stability of the rupee that has emerged over the past few weeks. The current account deficit came in at a mere $5.9 billion, or 1.2 per cent of GDP, a massive decline from the $21.4 billion recorded in the second quarter of 2012-13, a year which saw the deficit spike to 4.9 per cent of GDP. This decline has been attributed mainly to resurgent exports, which grew by almost 12 per cent year-on-year and, very importantly, by a large drop in gold imports, which, at $3.9 billion during the quarter, were less than 25 per cent of their level in the previous quarter. Clearly, both are positive developments, the first categorically, the second conditionally. Faster export growth in response to the depreciated rupee reflects the self-correcting aspect of the relationship between the exchange rate and the balance of payments. So far, it seems to be working as theory would predict. But, lower gold imports require more examination. If people have genuinely shifted their preference to other assets, that would certainly be positive, but if not, the demand is presumably being met through informal channels. There is evidence of this, both from the increase in customs seizures and patterns of gold imports into neighbouring countries. The official numbers, then, should not become a reason for complacency and initiatives to provide people with alternative investment channels to gold must be prioritised.

On the capital account, there was a surplus of $5 billion, almost equal to the current account deficit, which essentially explains the stability of the currency during a period which began after the US Federal Reserve announced the postponement of its taper in mid-September. The numbers clearly do not reflect the mismatch in flows that caused so much currency volatility for the first two-and-a-half months of the quarter. What they do suggest, though, is that when the taper does come, the Indian economy is in a far better position to withstand the shock. The many structural problems plaguing the current account haven't gone away by any means, but for the moment, they loom a little less menacingly.