However, Chidambaram says it may go up.
By R. Chandrasekaran
CHENNAI: At a time when the government and the Reserve Bank of India (RBI) are battling over a weakening rupee in the absence of strong inflow of money, current account deficit data for March quarter surprised not only the equity and currency markets but also economists and analysts. However, Finance Minister P. Chidambaram cautioned that it may go up as money outflows are faster.
The current account deficit for the fourth quarter that ended in March came in at 3.6 percent of the GDP, or $18.1 billion. The current deficit for the fiscal year ended in March 2013 was 4.8 percent of the GDP, or $87.8 billion compared to $78.2 billion in the previous year.
In comparison, last year’s fourth quarter deficit was $21.7 billion or 4.4 percent of the GDP. Significantly, in the December quarter, current account deficit was 6.7 percent of the GDP. Therefore, the latest data is, no doubt, a big relief, but whether it can be sustained in the coming quarters will be a question mark.
The data was released by the RBI a day in advance, probably to arrest the weakening of rupee. However, the announcement a day before clearly indicates how desperate the policymakers were in the backdrop of the recent rupee slide. The central bank appears to have dished out the information in advance probably to alleviate negative sentiments.
The RBI statement is also likely to give a different headache to the government. The slow down in current account deficit was essentially due to the fall of non-oil and no-gold components of imports. This is primarily is the result of the slowing domestic economic activity, the RBI has acknowledged.
Meanwhile, Indian stock markets advanced about 1.7 percent with Bombay Stock Exchange’s Sensex and National Stock Exchange’s Nifty recording a gain of 323.83 points and 93.65 points, respectively. The gains could be partly due to the current account data as well as short covering since derivatives contract expired Thursday. However, the Indian rupee strengthened after the data was released.
The finance ministry blamed the market pessimism for the recent drop in rupee as the worry over the current account deficit was a major factor behind in dragging it down.
Though the fourth quarter current account deficit data was better than predicted, Chidambaram had clearly stated that it may go up citing money outflows. Also, the wider trade deficit in April and May indicate that the first quarter of the current fiscal year will likely to result in higher deficit than last year and probably the fourth quarter, too. However, it remains to be seen whether it will be as alarming as the December quarter since gold imports contributed significantly to the trade deficit in April and May. Analysts have already starting predicting the current account deficit to be close to 5 percent of the GDP in the June quarter and the gap is predicted to be soft from the September quarter onwards as a result of the various measures taken by the government as well as the RBI.
Nonetheless, the latest data will not likely be a cushion for the central bank to announce interest rate cuts when they meet next time, probably in July. Though the economic is still weak, the currency impact will dampen the RBI’s enthusiasm for any rate cuts unless the rupee comes back to normalcy.