Current account gap hits record high

MUMBAI Thu Mar 28, 2013 8:36pm IST

An employee counts rupee notes at a cash counter inside a bank in New Delhi June 8, 2010. REUTERS/Mukesh Gupta/Files

An employee counts rupee notes at a cash counter inside a bank in New Delhi June 8, 2010.

Credit: Reuters/Mukesh Gupta/Files

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MUMBAI (Reuters) - Government said on Thursday it would do what was needed to tackle its current account deficit, after heavy oil and gold imports together with muted exports drove the gap to a record high in the December quarter.

In a worse-than-expected reading that will keep the rupee under pressure, the deficit hit $32.63 billion in the final three months of 2012, compared with $22.3 billion in the September quarter.

While robust inbound investments into equities and debt have enabled India to fund the gap, these flows can be fickle and a sharp reversal, possibly triggered by an external shock, would leave the balance of payments at risk.

The finance ministry said the deficit was likely to moderate in the March quarter if the current trend of improved exports and steady imports persisted.

The government and central bank would take additional steps whenever warranted to tackle the gap, it said.

Economists, who had on average forecast a figure of just over 6 percent of GDP, also expect the gap to narrow in the current quarter and beyond.

That should give some relief to policymakers also struggling to inject momentum into an economy that appears to be growing at its slowest rate in a decade while also trying to stifle inflationary pressures. Growth of 5 percent is expected for the fiscal year ending this month.

"We expect gold imports to ease going forward, exports to improve and oil imports to grow at a single digit given that global oil prices probably won't go up sharply," said Shivam Chakravarti, economist at HDFC Bank.

For April-December, the current account deficit was $71.7 billion, or 5.4 percent of GDP.

Net dollar inflows into stocks and bonds in 2012 totalled around $31 billion, and the rupee moved in a band of 48.60-57.32 to the dollar.

The rupee ended at 54.28/29 per dollar on Thursday. The data was released after the onshore currency market closed.

Many economists and traders expect the currency to come under pressure later in the year with a national election due by May 2014, which could make the Congess-led minority coalition wary of introducing politically unpopular reforms.

India ran a marginal balance of payments surplus of $781 million for the October-December quarter thanks to robust dollar inflows, compared with a deficit of $158 million in the previous quarter, data from the Reserve Bank of India (RBI) showed.

"The pickup in capital flows was mainly due to foreign portfolio investment," the RBI said.

So far in 2013, net dollar inflows into equity and debt markets have totalled $12.70 billion.

The rupee was the third worst performing currency in Asia in 2012, even though net inflows into Indian stocks were the highest in the region. It closed 2012 at 55.00 per dollar, having lost 3.3 percent of its value over the year.

The financial account, which includes foreign direct investment, portfolio investment and overseas borrowing by Indian companies, showed a surplus of $31.1 billion in the December quarter, compared with $24.2 billion in the previous quarter.

The fiscal deficit during the April-February period was 5.07 trillion rupees, or 97.4 percent of the budgeted full fiscal year 2012/13 target, data earlier on Thursday showed.

(Editing by Simon Cameron-Moore, John Stonestreet)

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Comments (1)
Subrabhama wrote:
There is an acute feeling of Deja Vu. In fact it is recurring from time to time. First the BOP will widen, then the currency will come under pressure, there will be pressure from Indi. Inc. to intervene, then the government will engage in some additional liberalization for capital inflows, the stock markets will shoot up or gyrate and there will be some semblance of stability. The Finance Minister will blame it on the euro crisis or, better still, Cyprus! The problem is that our economic structure lacks balance and the manufacturing sector which should be sheet anchor to withstand troubles from abroad is weak. The government has not been able to bolster industrial growth and it has created too much of import dependence. Oil and gold imports are like two mill stones round our neck. The government has no fiscal muscle to be able to strengthen the industries or infrastructure like some of the other developing countries. In the name of “reforms” the State has totally withdrawn and left the entire burden to the market (India Inc.) which is unequal to the task. The result is that we will move from one crisis to another and put the blame on “coalition compulsions.” It is a sad story which recurs from time to time.

Mar 30, 2013 4:50pm IST  --  Report as abuse
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