CAD to come down in 4th quarter: Rangarajan

CAD to come down in 4th quarter: Rangarajan

It would end with little over 5 per cent

CAD to come down in 4th quarter: Rangarajan

Having hit a record 6.7 per cent of GDP in December quarter, India’s current account deficit is expected to show some improvement in the last quarter of this fiscal on account of likely uptick in exports, the Prime Minister’s Economic Advisory Council Chairman C Rangarajan said on Friday.

The current financial year, he hoped, would end with a CAD of little over 5 per cent.
“The CAD (in December quarter) was higher than expected... But I believe it will come down during the fourth quarter (January-March). For the year as a whole, I expect CAD to be a little higher than 5 per cent,” Rangarajan said.

The CAD widened to a historic high of 6.7 per cent of GDP in December quarter to $32 billion on account of surge in oil and gold imports, besides weak exports. It was at $20 billion (4.4 per cent of GDP) in the corresponding quarter of last fiscal. CAD is the difference between inflow and outflow of foreign funds.

Even at over 5 per cent, the CAD would be nearly double the mark of 3 per cent during 1991 — the year when India faced the foreign exchange crisis. Ratings agency Crisil’s chief economist D K Joshi said the higher CAD could weaken the rupee. However, it is expected to come down as a whole, he said.

Currency volatility

“The higher CAD increases vulnerability and dependence on foreign inflows. It causes lots of currency volatility which can weaken the rupee. Going ahead, we believe it will come down,” Joshi said. On whether the current balance of payment (BoP) problem could be equated with the situation faced during 1991, he added, “That was a different problem.”

Crisil in a note said that the government’s effort to revive the economy should be able to cover the widening CAD in the next fiscal. “We believe that if the domestic reform momentum continues, India should be able to attract sufficient inflows to cover its CAD in the next fiscal,” Crisil said.

However, rupee can depreciate sharply if capital flows dry up. “If there are any signs of a global economic drought, capital flows can dry up suddenly resulting in a temporary, but a sharp depreciation of the rupee,” it added further.