Capital inflows to offset CAD impact on Re

By : Neelasri Barman
Last Updated: Tue, Oct 23, 2012 21:10 hrs
A shopkeeper poses for a picture as he counts Indian currency notes at his shop in Jammu

The widening of the current account deficit (CAD) in the quarter ended September 30 might not have a negative impact on the rupee due to strong capital flows. In a poll conducted by Business Standard on the movement of the rupee against the dollar in the last quarter of 2012-13, most experts said the Indian currency would likely strengthen from the current levels. In fact, most do not expect the rupee to breach the 54 a-dollar mark for the rest of this financial year.

The data on CAD for the quarter ended September 30 is expected on December 31. The rupee on Tuesday ended at Rs 53.74 against the dollar, compared with the previous close of Rs 53.48.

"The variance in the CAD number is largely driven by price movements in crude oil and gold. As long as the variance is reflective of price movements in commodities, there may not be significant impact on the rupee. Given the bearish set-up on crude and gold price, the CAD number for December is not expected to cause a major alarm," said J Moses Harding, head-asset liability committee and economic and market research, IndusInd Bank.


Rs /$ trading range

IndusInd Bank 49-51
IDBI Bank 51-52
Union Bank of India 51-52
FirstRand Bank (India) 52-53
Axis Bank 52-54
Dhanlaxmi Bank 52-54
Alpari Financial
Services (India)
India Forex Advisors 53-55

According to Harding, if the government can stay firm on its reform process, with effective control on fiscal deficit, the Reserve Bank of India will shift to a growth-supportive monetary stance, thus providing consolidation for the rupee at Rs 49-51 per dollar in January-March.

CAD occurs when total imports of goods, services and transfers are greater than the country's total exports.

India's CAD for the quarter ended June 30 declined to $16.4 billion (Rs 88,120 crore on Tuesday) from $17.4 billion in April-June 2011 on moderation in the trade deficit and rise in remittances from Indians abroad. However, as a proportion of gross domestic product (GDP), it marginally went up to 3.9 per cent for the June quarter from 3.8 per cent a year ago.

But Sonal Varma and Aman Mohunta of Nomura Financial Advisory and Securities (India) said in a report on Thursday the CAD had worsened again in the September quarter.

According to estimates of Nomura, it worsened to an all-time high of around 4.9 per cent of GDP, compared with 4.2 per cent during the corresponding quarter a year ago.

According to Nomura, this has been on account of a sharp deterioration in the trade deficit.

Earlier this year, the rupee dived to a lifetime low of Rs 57.16 against the dollar. According to Harihar Krishnamoorthy, treasurer, FirstRand Bank (India), the fall was in the backdrop of chaotic global market sentiments. "If global fears are much less this time, as Europe attempts to sort its issues out, then exports' strength could come back. The rupee downside will be protected because the flows from foreign institutional investors (FIIs) into bonds will remain strong, considering people are speculating on interest rate cuts," he said.

Krishnamoorthy added: "Also, disinvestments and telecom auctions could also get some bulk inflows. Keeping in mind that GDP may grow at six per cent and FIIs inflows will continue, the rupee may trade in the range of Rs 52-53 in the January-March period."

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