Singh Aide Sees Narrower India Current-Account Gap Helping Rupee

India’s current-account deficit in the fiscal year may come in about 14 percent lower than the Finance Ministry has targeted, easing pressure on the rupee, an adviser to Prime Minister Manmohan Singh said.

The current-account gap for the fiscal year ending March 31 could shrink to $60 billion, or about 3 percent of gross domestic product, barring any unforeseen events, Chakravarthy Rangarajan, chairman of Singh’s Economic Advisory Council, said in an interview yesterday. Finance Minister Palaniappan Chidambaram last week said the government’s $70 billion target for the deficit served as a “red line.”

“We are moving in the direction of containing the current-account deficit, and the next three, four months will provide us the time to bring it down,” Rangarajan, 81, said at his New Delhi office. “It will be maintained at a reasonable level and should not cause too much pressure on the currency.”

Singh is struggling to revive Asia’s third-biggest economy, which grew at the slowest pace in a decade last fiscal year, as a higher import bill boosts prices for the majority of India’s 1.2 billion people who live on less than $2 a day. A narrower current-account deficit would provide India a buffer when the Federal Reserve begins to reduce stimulus, a prospect that prompted a slide in the rupee to a record low in August.

“When the next announcement for tapering comes, by that time India’s current-account deficit would’ve come down very substantially,” Rangarajan said. “We would also face a situation in which the capital flows could come down, but it will not cause any serious repercussions so long as the current-account deficit is maintained at a reasonable level.”

Rupee Slide

The rupee has slid 11 percent this year, the third-most among Asia’s top traded currencies behind Indonesia’s rupiah and Japan’s yen, according to data compiled by Bloomberg. It fell 0.2 percent in Mumbai yesterday to 61.9350.

Rangarajan’s current-account deficit projection of about 3 percent of GDP compares with Chidambaram’s target of 3.7 percent of GDP. The median forecast of 23 economists surveyed by Bloomberg News from Sept. 27 to Oct. 3 was 3.8 percent of GDP.

“The extent of correction in the current-account deficit could surprise positively this year,” said Shubhada Rao, chief economist at Yes Bank Ltd. Easing concerns over financing the deficit and a gradual improvement in economic growth will help the rupee strengthen toward 60 per dollar by the end of March, she said.

Exports Grow

Exports have climbed since July, snapping a three-month stretch of declines as the weaker rupee helped competitiveness. Overseas shipments rose 11 percent in September, while imports dropped 18 percent and the trade deficit shrank to $6.76 billion, the narrowest shortfall since March 2011, according to a government report yesterday and previously reported data.

The economy will expand 5 percent to 5.5 percent in the year ending March, the Finance Ministry said in its quarterly review released on Oct. 8. GDP growth will cool to 4 percent in that period, according to HSBC Holdings Plc. That would be the weakest pace in more than a decade.

Chidambaram plans to meet a budget deficit target of 4.8 percent of GDP in the year through March 2014, down from 4.9 percent the prior year, even after the gap reached 75 percent of the target in the first five months. Standard & Poor’s reiterated on Sept. 3 it may lower India to junk on risks including budget and current-account imbalances.

Price Increases

Government spending has contributed to consumer-price inflation that has remained at more than 9 percent for the past 18 months, which the Reserve Bank of India has tried to restrain. RBI Governor Raghuram Rajan raised the benchmark repurchase rate by a quarter of a percentage point to 7.5 percent on Sept. 20.

Rangarajan was Reserve Bank of India governor between 1992 and 1997. He picked up his doctorate from University of Pennsylvania in 1964.

Stable oil prices and higher agricultural production will bring inflation based on wholesale prices toward 5.5 percent by March 2014, Rangarajan said. The gauge stood at 6.1 percent in August, and averaged about 6.5 percent over the previous 12 months, according to data compiled by Bloomberg.

“In recent years, inflation has been triggered by food inflation,” Rangarajan said. “Therefore, moderation in food inflation, which will come from an improved agricultural crop, will have a positive impact.”

Before it's here, it's on the Bloomberg Terminal.