India's current account deficit widened to a record high 6.7 percent of GDP in the December quarter, driven by heavy oil and gold imports and muted exports, in a worse-than-expected performance that will keep the rupee currency under pressure.
While robust inbound investments into equity and debt have enabled India to fund the gap, these flows can be fickle and a sharp reversal, possibly triggered by an external shock, would leave the balance of payments at risk.
The current account deficit was $32.63 billion in the three months through December, compared with $22.3 billion in the September quarter and $20.16 billion in the December quarter of 2011. Economists had generally expected the deficit to be equivalent to just over 6 percent of GDP.
However, economists do foresee the current account gap narrowing in the March quarter and beyond.
That should give some relief for policymakers also struggling to inject momentum in an economy that appears set to show its slowest growth in a decade, with growth of 5 percent expected for the fiscal year ending this month, while also trying to stifle inflationary pressures.
"We expect gold imports to ease going forward, exports to improve and oil imports to grow at a single digit given that global oil prices probably won't go up sharply," said Shivam Chakravarti, economist at HDFC Bank.
For April-December, the current account deficit was $71.7 billion, or 5.4 percent of GDP.
Net dollar inflows into stocks and bonds in 2012 totalled around $31 billion, and the rupee moved in a band of 48.60-57.32 to the dollar.
The rupee ended at 54.28/29 per dollar on Thursday. The data was released after the onshore currency market closed.
Many economists and traders expect the currency to come under pressure later in the year with a national election due by May 2014, which could make the Congess-led minority coalition wary of introducing politically unpopular reforms.
India ran a marginal balance of payments surplus of $781 million for the October-December quarter thanks to robust dollar inflows, compared with a deficit of $158 million in the previous quarter, data from the Reserve Bank of India (RBI) showed.
"The pickup in capital flows was mainly due to foreign portfolio investment which rose to $8.6 billion during Q3 of 2012-13 from $1.8 billion in Q3 of previous year," the RBI said.
So far in 2013, net dollar inflows into equity and debt markets have totalled $12.70 billion.
The rupee was the third worst performing currency in Asia in 2012, even though net inflows into Indian stocks were the highest in the region. The rupee closed 2012 at 55.00 per dollar, having lost 3.3 percent of its value over the year.
The financial account, which includes foreign direct investment, portfolio investment and overseas borrowing by Indian companies, showed a surplus of $31.1 billion in the December quarter, compared with $24.2 billion in the previous quarter.
The fiscal deficit during the April-February period was 5.07 trillion rupees, or 97.4 percent of the budgeted full fiscal year 2012/13 target, data earlier on Thursday showed.