With India spending more to import commodities such as crude oil and gold, the current account deficit worsened to a record high of 6.7 per cent of GDP in the October-December period of this fiscal. In the preceding quarter, the CAD was at 5.4 per cent of GDP.
The current account deficit (CAD), which is a key indicator of a country’s external vulnerability, arises when a country’s total imports of goods, services and transfers are greater than exports.
The market expectation for CAD in the reporting quarter was 6-6.50 per cent of GDP.
A widening CAD usually exerts downward pressure on the domestic currency, making imports costlier. This is a cause for concern for the Government as costly crude oil imports have inflationary impact.
In the third quarter, the current account, consisting of import and export of goods and services and income flows, saw a higher deficit of $32.6 billion against a deficit of $20.2 billion in the year-ago period.
In its latest macroeconomic and monetary policy document, the Reserve Bank of India had warned that the risks on account of CAD remain significant despite the likely improvement in the January-March 2013 period ( fourth quarter) over an expected sharp deterioration in the October-December 2012 period ( third quarter).
According to Madan Sabnavis, Chief Economist, CARE Ratings, “the CAD number is scary, much higher than expected. I don’t see any of the conditions to justify a CAD number of 5 per cent (as recently predicted by C. Rangarajan, Chairman, Prime Minister’s Economic Advisory Council) for FY13.”
The CAD in the fourth quarter is likely to be in the 5.50-6 per cent of GDP range. FY13 could end with a CAD of over 5.50 per cent.
Given that the CAD is at an all-time high and inflation, at the retail level, is showing no signs of ebbing, the RBI is unlikely to cut interest rates in a hurry.
Sabnavis observed that the interest rate differential between India and Western markets is helping attract foreign exchange inflows, especially via foreign portfolio investments and external commercial borrowings. If the RBI cuts interest rates then it could impact these inflows.
Trade deficit (excess of imports over exports) at $59.6 billion in the reporting quarter amounted to 12.3 per cent of GDP. Overall, in the first nine months of this fiscal, this deficit stands at $150.3 billion ($138 billion in the year-ago period).
Given that during April-December 2012 there was an accretion to foreign exchange reserves by $1.1 billion as compared to a drawdown of reserves worth $7.1 billion in the corresponding year-ago period, market players feel the rupee is unlikely to be under much pressure.
In the week ahead, the rupee is expected to trade weaker in the 54.50-55 range to the dollar range against Friday's close of 54.27.