30.9.13

CAD talk


Predictions of a balance of payments crisis in India similar to the one in 1991 may have been exaggerated. Based on the latest data, the finance ministry expects the current account deficit for the current year at 2.6% of GDP or $48.2 billion, much below its August estimate of $70 billion or 3.7% of GDP and a big improvement over the record 4.8% posted last fiscal. Finance minister P Chidambaram should not only be able to fund this deficit, as he has been repeatedly promising, but also add $20 billion to the foreign exchange kitty in the fiscal.


Some private estimates have also pointed to a dramatic improvement in this measure of the economy’s external health. A rapid slide in the rupee to an all-time low of 68.81 to the dollar at the end of August had raised concerns over a ballooning CAD. The rupee has since strengthened to 62 levels. A Credit Suisse note pegs the 2013-14 CAD even lower than the ministry estimates, assuming better inflow from invisibles, including IT exports.
The dramatic improvement is based on better-than-expected exports, compression in gold and other imports and tempered demand for oil. Exports rose 4% in April-August, against the ministry’s earlier estimate of 1.8% growth.
If this rate is maintained, and indications are it will be, the ministry expects exports for the full year at $319 billion against $312 billion estimated in the current account deficit break-up given by the finance minister in August that pegged the shortfall at $70 billion.
The robust order book position of exporters amid signs of a recovery in developed countries, their main markets, could actually see growth in shipments accelerate further.
The Federation of Indian Export Organisation (FIEO) lobby group expects a 25% rise in shipments in the September-December period. The rupee depreciation and steps to rein in imports are expected to slow down both gold and non-oil imports. The latest estimates peg gold imports at $35 billion against the previous estimate of $38 billion.
This assumes a sharp compression in gold imports to 800 tonnes in 2013-14. Gold imports have already come down, with April-August imports at 375.5 tonnes.
Preliminary estimates show imports have been much lower in September. Besides, the government still has the option of taking some more measures to contain non-oil imports such as raising duties on certain telecom and IT products.
Imports other than oil and gold had been pegged at $280 billion but are estimated to be lower at around $263 billion due to weaker rupee and a lower gross domestic product growth projection.
Tempering gold and non-oil imports will result in a saving of $15 billion. Oil imports are estimated at $172.9 billion.
However, the first-quarter balance of payments data, to be released on Monday, is expected to be an outlier. The current account deficit in the first quarter is likely to be around 4.4- 4.5% of GDP or around $19-20 billion on account of higher gold imports, according to another government official.


The country’s current account deficit or the difference between inflow and outflow of the foreign exchange for the quarter ended June 2013 moved up to $21.8 billion, or 4.9% of the gross domestic product, according to data released by Reserve Bank of India on Monday. This is sharply higher than the $18.17 billion deficit (3.6% of GDP) reported in the quarter ended March 2013 but lower than the 5% expected by markets.
With the deficit being more or less in line with expectations, foreign exchange dealers said that the exchange rate would now be driven by other factors such as fears of the US government shutdown, which is weighing on all global currencies. Earlier, before the RBI announced the deficit numbers, the rupee closed against the dollar at 62.62 – down 12 paise from Friday’s close of 62.50. In September, the rupee recorded its first monthly gain in five months and its best month in a year.
Bankers expect the deficit to improve dramatically in the quarter ended September 2013 due to a sharp drop in gold imports coupled with a pick-up in exports. In a statement on the balance of payments (BoP), RBI said that there was a slight drawdown in foreign exchange reserves of $300 million in Q1 to finance the deficit. In the quarter ended June 2012, there was an accretion of $500 million to the reserves.




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