India’s Shrinking Current-Account Gap Reduces Risks to Rupee

India’s current-account deficit narrowed to the lowest level since 2010 as gold imports cooled, offering a potential boost for the nation’s currency.

The deficit was $5.2 billion in July through September, compared with $21.8 billion for the prior quarter, the Reserve Bank of India said in a statement in Mumbai yesterday. The shortfall was equivalent to 1.2 percent of gross domestic product. The current account is the broadest measure of trade, tracking goods, services and investment income.

The government has increased taxes on gold imports in the world’s biggest user of the metal three times this year to help pare a trade imbalance that has weighed on the rupee. The currency’s 12 percent drop against the dollar in 2013 has begun to bolster exports, which climbed each month last quarter.

“A narrower deficit is a good rupee backdrop,” said Shubhada Rao, an economist at Yes Bank Ltd. in Mumbai. She said the rupee’s direction would now be guided by the Federal Reserve’s decision on when to taper U.S. monetary stimulus, a move that could affect capital flows to emerging markets.

The rupee was little changed at 62.3225 per dollar as of 11:26 a.m. in Mumbai. The S&P BSE Sensex (SENSEX) index of shares was also little changed.

Photographer: Dhiraj Singh/Bloomberg

A customer picks a gold ring at a jewelry store in the Zaveri Bazaar area of Mumbai. The increased taxes on inward shipments of gold are part of a wider push by Prime Minister Manmohan Singh to revive Asia’s third-largest economy. Close

A customer picks a gold ring at a jewelry store in the Zaveri Bazaar area of Mumbai.... Read More

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Photographer: Dhiraj Singh/Bloomberg

A customer picks a gold ring at a jewelry store in the Zaveri Bazaar area of Mumbai. The increased taxes on inward shipments of gold are part of a wider push by Prime Minister Manmohan Singh to revive Asia’s third-largest economy.

India’s Finance Minister Palaniappan Chidambaram has said he seeks a current-account deficit of less than $56 billion in the fiscal year ending March 2014. The shortfall was a record $87.8 billion in the previous 12-month period.

Capital Flows

The reduction in the shortfall last quarter was driven by a decline in the trade deficit as merchandise exports picked up and gold imports moderated, the RBI said.

The July-September deficit is the least in data going back to 2010, which are calculated using the latest applicable International Monetary Fund guidelines.

Kotak Mahindra Bank Ltd. predicts a $49.1 billion current-account gap this fiscal year. Religare Capital Markets Ltd. said the rupee will probably trade at 58 to 62 per dollar for now.

The increased taxes on inward shipments of gold are part of a wider push by Prime Minister Manmohan Singh to revive Asia’s third-largest economy. The RBI predicts GDP growth of 5 percent in the 12 months through March 31, the same pace as the last fiscal year, which was the weakest in a decade.

RBI Governor Raghuram Rajan offered concessional dollar-swaps for lenders to spur inflows and support the rupee after taking over at the central bank in September.

The swaps window, now shut, has garnered $34 billion, the central bank said yesterday. That’s helped the rupee appreciate about 10 percent since slumping to a record low in August.

Interest Rates

The currency “is not out of the woods, although the current-account deficit seems more manageable,” Taimur Baig, an economist at Deutsche Bank AG, said in a Nov. 22 statement.

The government should continue to try and reduce India’s vulnerability to swings in capital flows before the Fed tapers monetary stimulus, HSBC Holdings Plc said in a report.

Rajan has raised India’s benchmark interest rate by 50 basis points to 7.75 percent to fight consumer-price inflation exceeding 10 percent, the second-highest in a basket of 17 Asia-Pacific economies tracked by Bloomberg.

Goldman Sachs Group Inc. predicts he will raise the repurchase rate to 8.5 percent in 2014. Goldman in November raised its 2014 rupee prediction to 65 from 70.

“The key take away is that the movement of the rupee is no longer about the current-account deficit but about capital flows,” said Prasanna Ananthasubramanian, a Mumbai-based economist at ICICI Securities Primary Dealership. “It is a function of how global markets behave.”

To contact the reporter on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net

To contact the editor responsible for this story: Daniel Ten Kate at dtenkate@bloomberg.net

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