India’s widening trade deficit dampen hope of further interest rate cut

Main culprit is import of gold, silver

By R Chandrasekaran

CHENNAI: India’s trade deficit in April widened to $17.8 billion as import of gold, which recorded a whopping 138 percent surge, played the spoil sport in the government’s game plan to improve the current account deficit, which is deteriorating. The Indian stock markets reacted sharply by dragging the benchmark indices down by over two percent as hopes of current account deficit improvements looked dim, thereby preventing any scope for further easing of monetary policy.

While imports grew 10.9 percent to $41.95 billion, exports rose modestly by 1.6 percent to $24.16 billion. This resulted in 72 percent surge in April trade deficit to $17.8 billion from the previous month. The main culprit is import of gold and silver that jumped 138 percent to $7.5 billion as fall in the precious metal prices forced retailers to shop for them.

Before the trade deficit announcement, the government announced consumer price index inflation that slowed to 9.39 percent in April from 10.39 percent in March. Similarly, food prices recorded 10.61 percent rise in April, which was again slower than 12.42 percent increase in March. The government data on wholesale price index will be announced tomorrow. The expectation is for 5.50 percent on top of a 5.96 percent in March.

While the inflation data encouraged investors and industry to expect a friendly monetary policy, the widening trade deficit has wiped out any hope of a further easing of monetary policy by the Reserve Bank of India.

While reducing interest rates by 25 basis points on May 3, the central bank has voiced concern over the deteriorating current account and fiscal deficits besides consumer and food price inflation, though it takes into account wholesale price index for monetary policy decisions. The RBI Governor Dr. D. Subbarao also indicated that there was limited scope for reducing interest rates and termed current account deficit situation as biggest threat to the economy. The higher trade deficit has only further deteriorated current account deficit.

The RBI has also swung into action by imposing restrictions on import of gold in May. Its diktat came on the working group’s recommendations that suggested bringing import regulations of gold with other imports so as to create a level playing field among gold and other imports.

The sharp increase in trade deficit has had its effect on the Indian bourses. While the Bombay Stock Exchange’s 30-share barometer dropped 430.65 points or 2.14 percent to 19,691.67 points, the National Stock Exchange’s Nifty plunged 126.80 points or 2.08 percent to 5,980.45 points. The Sensex recorded the largest daily percentage drop after March 2012.

Despite the favorable impact from falling inflation, widening trade deficit resulting in deteriorating current account deficit is only nullifying it.

To contact the author, e-mail: rchandrasekaran@americanbazaaronline.com

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