A steeper decline in exports relative to imports and lower net income flows aggravated a key indicator of India’s external vulnerability — the current account deficit (CAD) — in the second quarter. The CAD rose to $22.3 billion (5.4 per cent of GDP) in July-October 2012 from $18.9 billion (4.2 per cent of GDP) in the year-ago period.

A CAD arises when a country's total imports of goods, services and transfers is greater than exports. This deficit number had fallen to $16.4 billion (or 3.9 per cent of GDP) in April-June 2012 from $21.7 billion (or 4.5 per cent of GDP) in January-March 2012.

The RBI's financial stability report, released last week, observed that the global growth slowdown in has curtailed the demand for Indian exports. On the other hand, imports have slowed to a lower extent as the major portion (oil imports) is relatively inelastic.

The report warned that the steeper decline in exports relative to imports could exacerbate the CAD. Over the same period, the steeper decline in exports than in imports led to a widening of the trade deficit to $48.3 billion, from $44.5 billion in the year-ago period.

A widening CAD exerts downward pressure on the rupee, making imports costlier. This is a cause for concern as costly crude oil imports have an inflationary impact.

In the first half of FY2013, the CAD rose sharply to 4.6 per cent (or $38.7 billion) from 4.0 per cent (or $36.3 billion), reflecting the slowdown in GDP and significant rupee depreciation, the RBI said.

Meanwhile, the rupee ended weaker at 54.98 to the dollar, down 21 paise from the previous close on the back of demand for the greenback from importers. According to a forex dealer with a state-run bank, the CAD will lead to a bearish sentiment on the rupee in the short-run. However, budget expectations and forex inflows will buoy the Indian currency.

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