June 27, 2013 12:04 pm

India’s current account deficit falls to 3.6% of GDP

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India’s current account deficit fell unexpectedly in the quarter ending in March, helping the rupee recover from Wednesday’s record low and pushing shares up by about 1 per cent.

The country suffers from one of the highest current account deficits of any big economy, a problem that senior government figures have described as its most pressing macroeconomic challenge.

But Reserve Bank of India data published on Thursday showed that the deficit fell to 3.6 per cent of gross domestic product between January and March, a shade above $18bn and down from $21.6bn during the same period last year.

“It clearly came in better than expectations, and about $5bn less than our estimate,” said Rohini Malkani, chief economist at Citi in Mumbai. “This seems mostly to be because India’s trade deficit narrowed in the quarter, while oil and gold came in lower, given their prices have been higher of late.”

However, the full-year current account deficit rose to 4.8 per cent of GDP, or $88bn, up from $78bn during the previous financial year, the RBI said.

India’s economic situation has been especially precarious in recent months, with a recent sharp slowdown in growth exacerbated by a withdrawal of capital following Federal Reserve chairman Ben Bernanke’s comments on the early “tapering” of US quantitative easing.

Any capital outflows are especially alarming in Asia’s third-largest economy, which requires a steady influx of portfolio and other investments to fund its current account deficit, which reached a record 6.7 per cent of GDP in the October to December quarter.

Recent worries about emerging markets have hit India’s currency, which has hit repeated lows in recent weeks, closing below Rs60 to the dollar on Wednesday before recovering slightly following the RBI’s data release.

Palaniappan Chidambaram, finance minister, has launched a number of policies designed to curb the current account gap, including a recent rise in gold import duty designed to stem the country’s seemingly inexhaustible demand for the yellow metal.

But analysts cautioned that Thursday’s RBI data were more likely to be a temporary improvement rather than a sustained turnround, despite recent falls in prices of commodities, where India is a net importer.

“What we have been highlighting is that India’s current account now faces a real battle between commodity tailwinds and capital flow headwinds,” said Rohini Malkani at Citi.

“India benefits from lower commodity prices but it is hurt by capital leaving. And the trouble is, at the moment, with the Fed’s QE tapering, it looks as if capital outflows are winning, so things may not keep improving.”

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