Last week the Reserve
Bank of India (RBI) released quarterly BOP data which showed India’s current
account deficit reached below a new high of 32 billion USD or 6.7 per cent of
GDP in Q3 FY 2012. CAD, however is
expected to narrow down as a result of slowing consumption, sluggish
investment, fiscal consolidating, and moderating oil prices and gold imports,
we project the full year figure will
come in around 5 per cent—well above the RBI’s estimate of a sustainable level
of about 2.5-3 per cent. The stockmarket will then see a new kind rejuvenation and traders in nifty
might look forward to encash the profit.
Given that it will likely remain around 4-5 per cent of GDP over the
medium-term, the CAD will limit the RBI’s space for rate cuts, keep downward
pressure on INR, and increase india’s reliance on potentially volatile
portifolio flows.
While a surge in capital inflows due
to DM liquidity and government reform efforts was sufficient to finance the CAD
in Q3, while the quality as per expert in technical analysis, the
quality of financing remains a concern.
The net FDI declined to 2.5 from 5 billion, in Q3, while portfolio
inflows rose to 8.6 compared to 1.8 billion over the same period a year ago.
This causes the sharp volatility in the stock market and intraday
traders change their trading strategy based on the news upon
it.
More importantly, there
has been notable deterioration in India’s external debt, through the situation
appears manageable. Total external debt
rose to 378 billion from 260 billion in 2009 - 10. The size of India’s external debt is not a
problem itself, at 18.3 per cent of GDP it is the 3rd lowest amongst
developing countries while its FX reserves cover 81 per cent of total
debt.
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