Reserve Bank expects trade deficit to moderate in Q2

The current account deficit is expected to moderate in the second quarter of the current financial year, driven by improvement in the trade balance, said the Reserve Bank of India’s macroeconomic and monetary developments second quarter review, issued on Monday.

“India’s CAD widened from 3.6 per cent of gross domestic product in the fourth quarter of 2012-13 to 4.9 per cent of GDP in the first quarter of 2013-14.

"With some visible improvement in the trade balance in the second quarter of 2013-14, it CAD is likely to show a significant correction,” said the review.

Despite a higher CAD in the first quarter, capital inflows were broadly adequate to finance the current account gap, requiring only a marginal drawdown of foreign exchange reserves, it said.

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It says inflows from foreign institutional investors, which had turned negative since end-May, reversed in September.

Besides, pressure on the rupee appears to be abating.

Since the introduction on September 10 of the swap facility for foreign currency non-resident account (banks) or FCNR(B) deposits and bank foreign borrowings, $6.9 billion and $4.4 billion had been received under the respective schemes until October 25.

“Although the exact timing of a possible tapering by the Fed remains unclear at present, what is obvious is that market participants have been making adjustments to a new world of potentially less liquidity,” said the review.

The rupee had touched an all-time low of 68.85 to a dollar on August 28 in intra-day trade.

. . .

It recovered from there due to various steps taken by the central bank.

On Monday, it closed at 61.53, compared with Friday’s close of 61.46, due to a fall in domestic stocks and sentiment remaining cautious ahead of RBI's second quarter monetary policy review, to be detailed on Tuesday.

“The (US) Fed’s decision on September 18 to continue with the monthly quantum of asset purchase, stating they will await more evidence of an enduring economic recovery before adjusting their pace, brought significant improvement in market sentiment,” the review said.

The review states that although the signing of the US fiscal deal on October 17 avoided a debt default there, concerns remain as the deal only funds the US government till January 15 and raises the debt ceiling through February 7.

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Further, contentious debate over spending cuts and entitlement programmes seem likely for several months.

CAUTIOUS OPTIMISM

• Despite higher CAD in Q1, capital inflows broadly adequate to finance the current account gap
• Inflows from foreign institutional investors, negative since end-May, reversed in September
• Swap facility for FCNR(B) deposits, bank foreign borrowings got $6.9 bn & $4.4 bn, respectively, as of October 25
• Despite the US fiscal deal signed on October 17, concerns remain as deal funds US govt only till January 15