India needs $25 bn flows to bridge CAD gap India’s current account deficit (CAD) may have peaked last year, but funding the gap is becoming a bigger concern. Sajjid Chinoy and Jahangir Aziz of JP Morgan calculate the CAD gap at a whopping $20-25 billion (Rs 150,000 crore). “Attracting such a quantum of portfolio flows in the current environment of rising US Treasury yields, weak growth at home, and an approaching general election appears ambitious to say the least,” the duo said in a note. CAD has been funded through volatile capital flows for each of the last three years. About $20-25 billion came through volatile flows in these years, while the balance $ 50-55 billion were stable flows. To add to woes, India’s external funding mix has deteriorated with about 53.5% of the total capital flows in the last 12 months coming from debt-creating flows that used to be an average 43% in the last 10 years, Chetan Ahya and Upasana Chachra of Morgan Stanley wrote. India’s CAD hit a record $87.8 billion or 4.8% of the gross domestic product (GDP) last fiscal, up from $ 78.2 billion or 4.2% in the year before. According to the Reserve Bank of India (RBI), increasing trade deficit and falling invisible earnings are the reasons for this. CAD may, however, narrow this financial year. Chinoy and Aziz peg the figure at $80-85 billion, while Ahya and Chachra come up with $ 77.5 billion. So how does the country bridge the gap? Through solid and long-term measures, aver economists. “The government has taken steps like increasing the foreign investment limit in debt to attract inflows. However, we saw the impact of the outflow. Hence, depending on hot money flows is not a solution,” said A Prasanna, chief economist at ICICI Securities Primary Dealership, which pegs the CAD number at $79 billion. He, however, expects the funding gap at just $8-9 billion for the current financial year. About $8.15 billion (Rs 47,440 crore) of foreign institutional investment in Indian debt has been pulled since May 22, when the US Federal Reserve indicated an early tapering of the monthly bond-buying programme. As a result, the rupee has been falling to new record lows, touching 61.21 against the greenback on Monday. “We believe the policy decision of allowing the currency to depreciate is a better option than tightening monetary conditions with aggressive intervention in forex markets,” Ahya and Chachra said. They expect government to resort to foreign fund raising by state-owned companies and deposit schemes or sovereign bond issuances for non- resident Indians to attract inflows.
Posted on: Fri, 12 Jul 2013 07:38:30 +0000
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