Deficit financing fears loom large

The expected decline in current account deficit (CAD) for the last quarter of fiscal 2013, to be released on June 28, is unlikely to provide any real comfort to the government given the selling spree witnessed in debt and equity markets by foreign institutional investors (FIIs).

Further, the sharp fall in rupee has offset much of the benefit that could be derived from declining commodity prices globally and has actually stoked fears of inflation, according to DBS Bank Economist (Group Research) Radhika Rao.

In a note, she said, “The respite could be swiftly overwhelmed by financing concerns after recent significant foreign outflows from the equity and debt markets. The stark rupee depreciation also poses renewed risks to the current account position, by jeopardising the benefit from lower international commodity prices and possible feed into inflationary expectations.”

Estimating the fourth quarter CAD at $24 billion or 4.7 per cent of the gross domestic product from a high of 6.7 per cent ($32.6 billion) in the third quarter, she said the fiscal 2013 CAD would be 5.1 per cent, compared to 4.2 per cent in the previous fiscal .

In the second quarter of fiscal 2013, the CAD was 5.4 per cent, up from 3.9 per cent in the first quarter.

Rao added that the caution over the rise in US bond yields and its subsequent impact on capital flows to India will keep domestic asset markets under pressure in the near-term.

This is evidenced from FIIs embarking on a selling spree, pulling out about $5 billion from debt and equity markets in from June 1-21, while on June 24 their net outflow from both the markets was $459.23 million, according to market regulator Sebi data.
Foreign direct investment, which is long-term in nature compared to FII, was not encouraging in 2012-13, with inflows falling 36 per cent to $22.4 billion from $35.1 billion in 2011-12.