$10 bn outflow,bunching of CAD add to woes

A net capital outflow of $10 billion and an unprecedented bunching of the current account deficit in October-December quarter have become a source of worry for policymakers

A net capital outflow of $10 billion and an unprecedented bunching of the current account deficit in October-December quarter have become a source of worry for policymakers. The ebbing confidence of both domestic and foreign investors in the rupee,they reckon,could take time to revive and the current sentiments could likely spill over to the next quarter. This could cause the downward pressure on the rupee to persist and potentially cause a self-perpetuating spiral.

The rupee had fallen 15 per cent against the dollar since October till the Reserve Bank of India on Thursday took measures to prop it up. It recovered to Rs 52.80 on Friday.

The current quarter will likely see an unprecedented addition to the current account deficit (CAD),at $20 billion or about 40 per cent of the deficit projected for the whole fiscal.

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Worse,the financing of this higher level of CAD has become all the more difficult with the outward foreign direct investment flows of an unprecedented $14 billion. The higher outflow has reduced the net FDI inflows to exactly half of the gross inflows,at some $15 billion.

There are signs that both domestic and foreign investors look at the rupee with scepticism. Net portfolio investment so far this year is just about $6.5 billion at present (portfolio equity flows remain evened out),a sharp contrast to last year,which saw foreign institutional investors making record net investments in Indian stocks.

Given the downward bias in the rupee,exporters were booking a forward contract,cancelling it and then rebooking it at a better rate,which was contributing to the free fall of the rupee, said Rupa Rege Nitsure,chief economist at Bank of Baroda.

Government sources here said that even though the rupees depreciation could lead to the deferment of imports in many cases,oil and gold imports might not see any curbs as these are largely inelastic to the rupees exchange rate. That means sustained pressure on the merchandise trade deficit,and resultant stress on the current account. Gold imports in the first half of this year stood at $32 billion,close to the imports in the whole of last fiscal year of around $34 billion.

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Although there is a substantial interest rate differential between Indian and foreign debt companies are likely to curb external commercial borrowings as the rupees fall has offset that advantage. Indian companies raised $20.73 billion in ECBs and FCCBs between April and October this year.

With about $140 billion foreign loans likely to mature over the next year,the RBIs capacity to prop up the rupee is also constrained. Policymakers are also see the possibility of costly imports stoking inflation,which the government and RBI have predicted to fall to 7 per cent by March. FE