CAD moderates to 3.6%

‘Short-term increase or decrease in CAD should not be a cause for either optimism or pessimism’

June 27, 2013 06:36 pm | Updated November 26, 2021 10:24 pm IST - New Delhi

cartoon rupee other editions colour 280613

cartoon rupee other editions colour 280613

After continued sessions of mayhem on the bourses and the free fall of the rupee to an unprecedented low of 60.72 against a perceptibly strengthening U.S. dollar a day ago, the Reserve Bank of India (RBI) on Thursday pegging the current account deficit (CAD) at 4.8 per cent of the GDP in 2012-13 came as a big respite. It offered a soothing balm to the authorities who have been at their wit’s end to stem the currency volatility and also provided time to small investors to nurse their networth wounds after the heavy battering of stocks.

Even as the CAD at a record high of 4.8 per cent of the GDP last fiscal as against 4.2 per cent in 2011-12 continues to be a matter of concern, the positive cue was that the whole year’s figure surprised the market which had expected more. What came as a further silver lining was that the net deficit in foreign currency inflow in the fourth quarter (January-March) of 2012-13 signalled a sharp moderation to 3.6 per cent from a historic high of 6.7 per cent of the GDP in the third quarter (October-December) quarter of the fiscal.

Thus, with the CAD in the fourth quarter of 2012-13 markedly lower than the 4.4 per cent in the same quarter of 2011-12 , both the rupee as well as the stock market recovered a part of the lost ground during the day’s close.

However, despite the day’s euphoria which saw the rupee recover partly to 60.23 against the greenback, the high CAD continues to be a worrying factor, especially as it is still way above the RBI’s comfort level of 2.5 per cent of the GDP. According to the RBI data, while theCAD in 2011-12 was at $78.2 billion (4.2 per cent), a surge in oil and gold imports widened the gap further to 4.8 per cent at $87.8 billion last fiscal.

The challenges

In the event, presenting a non-committal view, the Finance Ministry noted that the short-term increase or decrease in CAD should not be a cause for either optimism or pessimism. “We must look at the figure at the end of the year where the CAD stands…Markets have been over reacting as we have seen in the case of prediction for CAD last year which were much higher than 5 per cent and we have seen that it is much lower than five per cent,” it said.

The RBI data revealed that oil and gold made up about 45 per cent of the total merchandise imports during 2012-13 with petroleum import going up by 9.3 per cent and that of gold declining by 4.8 per cent to $53.8 billion, marginally down from $56.5 billion in the previous fiscal. Accordingly, the trade deficit during the fiscal year remained elevated at $195.7 billion in the wake of a decline in merchandise exports by 1.1 per cent coupled with a rise in imports by 0.5 per cent on a yearly basis.

Widening trade deficit

The apex bank pointed out that in 2012-13, the CAD widened on account of a “burgeoning trade deficit, decline in net invisible earnings due to sharp increase in investment income payments and only a modest rise in net services receipts.”

Significantly, the ways of bridging the CAD were also queered during 2012-13 owing to the type and quality of foreign inflows. While the longer term FDI (foreign direct investment) inflows moderated during the fiscal , portfolio investment witnessed a surge. Net FDI inflows eased to $19.8 billion from $ 22.1 billion in 2011-12 while net portfolio investment rose to $26.7 billion in 2012-13 from $16.6 billion a year ago.

On the whole, during 2012-13, there was an accretion of $3.8 billion in the country’s foreign exchange reserves as compared to a draw-down of reserves to the extent of $2.8 billion in 2011-12, it said.

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