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Positive data from the Reserve Bank of India (RBI) on the value of the country’s transactions with the rest of the world brought momentary cheer to the rupee, which had breached the level of 60 to the dollar on Wednesday.
The current account deficit (CAD, the difference between outflow and inflow of foreign currency) is a key component of the value of transactions with the rest of the world. The deficit moderated to 3.6 per cent of gross domestic product (GDP) in the January-March quarter, on the back of an increase in exports and a marginal decline in imports, as per RBI data released on Thursday.
The deficit had touched a historic high of 6.7 per cent of GDP in the October-December quarter. On an annualised basis, the deficit rose to 4.8 per cent in 2012-13, from 4.2 per cent in 2011-12.
A higher CAD means increased dollar outgo, putting further pressure on the rupee. A comfortable CAD level for economies such as India is 2.5 per cent, which is why the situation had become alarming, forcing the Government to initiate efforts to curb gold imports. Expenditure on net gold imports makes up over 40 per cent of the deficit.
Interestingly, the RBI data were supposed to be released on June 28 after market hours. But, in an apparent bid to spread some positivity, the numbers was released at around 9 a.m on Thursday, before the stock and currency markets opened. This buoyed the BSE benchmark Sensex and NSE’s Nifty, which closed with gains of over 300 points and 90 points, respectively. The rupee, too, recovered to end the day at 60.19, from Wednesday’s close of 60.73 to the dollar.
FinMin cautious
Though relieved, the Finance Ministry said any short-term increase or decrease in CAD should not be a cause for optimism or pessimism. “We must look at the figure at the end of the year,” it said.
Referring to the resultant fall in the rupee, the Ministry said: “Markets have been over-reacting, as in the case of prediction for CAD last year at much higher than 5 per cent. And we have seen that it is much lower than 5 per cent.”
Rating agency Crisil said at 4.8 per cent of GDP for 2012-13, the country’s foreign capital requirement to cover the CAD was alarmingly high, at almost $90 billion. “The dip in CAD in January-March quarter of 2012-13, we believe, is temporary and it will rise to settle at 4.5 per cent of GDP for FY14 (2013-14),”it said.
It also mentioned that financing the current account deficit was a bigger challenge this year. For one, global liquidity will be stretched if the US recovery continues and the Fed Reserve starts winding up its bond purchase programme in 2013-end. Also, with much weaker growth prospects vis-à-vis other emerging markets, India’s attractiveness as an investment destination was waning, it said.
STCI Primary Dealer, in a report said, the CAD was undoubtedly at an uncomfortably high level and remains a matter of concern for policy-makers. “Sharp weakening in the currency will continue to pose challenges for financing the CAD. Given the grave implications of the depreciating rupee on the economy, RBI is most likely to keep rates on hold in the July 13 policy reveiw,” it said.
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