India Current-Account Gap Narrows in Boost for Singh Rupee Rally
India’s current-account deficit narrowed last quarter from a record, boosting the outlook for the rupee as a policy overhaul by Prime Minister Manmohan Singh to revive economic growth buoys the currency.
The shortfall in the broadest measure of trade was $16.4 billion in the three months ended June 30, compared with a $21.7 billion gap from January through March, the Reserve Bank of India said in a statement yesterday. The median of 16 estimates in a Bloomberg News survey was a $14.2 billion deficit.
The rupee is among the world’s best performers versus the dollar since Sept. 13, climbing about 5 percent as Singh unveiled steps to contain a fiscal deficit and spur investment after months of inaction that hurt Indian expansion. The government is striving to avert a credit-rating downgrade that may disrupt the inflows of foreign capital needed to fund the current-account gap.
“Pain on the deficit front seems to be easing for now and comes along with the reform initiatives,” said Tirthankar Patnaik, a Mumbai-based strategist at Religare Capital Markets Ltd. “If the government maintains the pace, it will be positive for sentiment and the currency.”
The rupee strengthened 0.3 percent to 52.86 per dollar yesterday, paring its drop over the past year to 7.8 percent. The BSE India Sensitive Index (SENSEX) of stocks rose 1 percent, while the yield on the 8.15 percent bond due June 2022 declined to 8.15 percent from 8.16 percent on Sept. 27.
The current-account deficit last quarter was equivalent to 3.9 percent of gross domestic product, yesterday’s report showed. The trade gap narrowed to $42.5 billion from $51.7 billion in January-to-March.
India imports about 80 percent of its crude oil, while Europe’s debt crisis has crimped the nation’s overseas sales, contributing to its trade shortfall. The South Asian nation is also the world’s biggest bullion buyer. The government doubled the import tax on gold bars and coins to 4 percent in March to deter inward shipments of the metal.
The administration announced a 14 percent increase in diesel prices on Sept. 13, the first rise in more than a year, to pare fuel subsidies that have stoked India’s budget shortfall.
Singh opened the retail, aviation, energy and broadcast industries to more foreign investment the next day, countering opposition to the revamp by saying the moves are necessary to rejuvenate the economy, spur expansion and generate jobs.
The current-account deficit widened to an unprecedented $78.2 billion in the fiscal year ended March, or 4.2 percent of GDP, compared with the 2.5 percent considered sustainable by the Reserve Bank.
Growth in the Indian economy slumped below 6 percent in the past two quarters, the weakest performance since the global recession in 2009. Fitch Ratings and Standard & Poor’s reduced the outlook on India’s credit rating to negative from stable earlier this year, imperiling its investment-grade status.
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