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Economists say the drop in the country’s current account deficit (CAD), seen in the quarter ended March, may not be sustained. Also, financing the CAD is seen as a challenge.
In the quarter ended March, CAD narrowed sharply to $18.1 billion, or 3.6 per cent of gross domestic product (GDP), as trade deficit narrowed. In the quarter ended December, it had had risen to a record high of $32.6 billion, or 6.7 per cent of GDP. In the quarter ended March 2012, CAD stood at $21.7 billion, or 4.5 per cent of GDP. For 2012-13, CAD rose to record high of 4.8 per cent of GDP, though it was less than market expectations of five per cent.
On Thursday, Finance Minister P Chidambaram said CAD might widen, owing to outflows. Of late, foreign institutional investors have been pulling out of Indian debt, as US treasury yields are becoming attractive.
“The dip in CAD in the fourth quarter of 2012-13, we believe, is temporary; it would rise to settle at 4.5 per cent of GDP for 2013-14. Financing CAD is a bigger challenge this year. First, global liquidity would be stretched if the US recovery continues and as the US Federal Reserve starts winding up its bond purchase programme by 2013-end. Second, with much weaker growth prospects vis-à-vis other emerging markets, India’s attractiveness as an investment destination is waning,” said Dharmakirti Joshi and Dipti Deshpande of CRISIL.
In the quarter ended March, merchandise exports increased 5.9 per cent, against 2.6 per cent a year ago; merchandise imports fell one per cent, against an increase of 22.6 per cent in the quarter ended March 2012. Essentially, the non-oil, non-gold component of imports saw a decline, reflecting a slowdown in domestic economic activity. As a result, trade deficit narrowed to $45.6 billion from $51.6 billion in the quarter ended March, 2012.
For 2012-13, CAD stood at $87.8 billion, or 4.8 per cent of GDP, against $78.2 billion, or 4.2 per cent of GDP, in 2011-12. The burgeoning trade deficit, along with a significant decline in invisible earnings, led to a wider CAD.
On the balance-of-payment (BoP) front, India improved its position, with accretion of $959 million to the foreign exchange reserves in the quarter ended March, compared with accretion of $800 million in the quarter ended December. “While the BoP print is certainly favourable, we think it wouldn’t offer much cheer for the rupee. The sharp sell-off in the Indian currency against the dollar through the past month has sparked little reaction from policymakers so far. Of late, the central bank seems relatively less averse to intervening in dollar/rupee,” said Siddhartha Sanyal and Rahul Bajoria of Barclays Capital.
On Thursday, the rupee closed at Rs 60.2 against the dollar, compared with its previous close of Rs 60.73. Yesterday, it had fallen to Rs 60.77 a dollar in intra-day trade, an all-time trading low. On Thursday, the rupee strengthened on news of CAD narrowing in the quarter ended March. It opened at Rs 60.46, touched an intra-day high of Rs 60.11 and a low of Rs 60.63 a dollar.
Economists are concerned about how India would continue to fund the CAD, considering the rise in risks for investors due to the rupee’s recent depreciation and volatility. “As a structural CAD country, India requires a steady state of net inflows on the capital account, but recently, there have been large portfolio outflows. Foreign direct investment should remain more resilient, but many promised projects remain held up for want of government approvals. With rising risks to growth, some may be deferred or cancelled. This is a key challenge for the government, which is facing an election in mid-2014,” said Roland Randall, senior economist at ANZ.
