'US taper not to hit Indian economy; CAD stable'

 Tapering of fiscal stimulus by the US Federal Reserve will not hit Indian economy as the country’s foreign exchange reserves are stable and the current account deficit (CAD) for this financial year is likely to be sustainable, India Inc said on Thursday.

“India is now definitely in a better position to manage its balance of payments as the government and RBI have taken effective steps to build up forex reserves and render stability to the foreign exchange market,” Ficci President Naina Lal Kidwai said.

“The recent trends clearly indicate that CAD for this fiscal would narrow down to less than $50 billion, well within sustainable limits,” Kidwai added.

The US Federal Reserve last night announced that it would reduce the monthly bond purchases to $75 billion from the existing level of $85 billion from January.

“We do not expect the tapering to really cause any big disruptions in India’s external sector and the rupee is expected to remain range bound. The position with regard to current account deficit (CAD) is quite stable and is likely to remain so,” Assocham Secretary General D S Rawat said.

“The positive side to the tapering phenomenon is that the US economy is improving which will enhance potential for exports to the US. It will provide a fillip to the export sector which in turn would mean further improvement in CAD,” Rawat added.

The US Federal Reserve had first in May hinted it will taper bond purchases, sending the markets world over in a tizzy.

India’s current account gap narrowed sharply to $5.2 billion, or 1.2 per cent of GDP, in the July-September quarter of 2013-14 on the back of turnaround in exports and decline in gold imports.

Both the government and RBI are expecting the CAD to be below $56 billion in the current fiscal compared to the record high of $88.2 billion, or 4.8 per cent of the GDP last fiscal.
The current account deficit (CAD), the difference between outflow and inflow of foreign exchange, was $21 billion, or 5 per cent of the GDP, in the second quarter of last fiscal.

The government has taken several steps, including hike in gold import duty to 10 per cent and restrictions on import of gold bars and medallions, to restrict CAD. It has also taken measures to boost exports, taking advantage of depreciating rupee.

In the currency markets, the rupee closed 5 paise lower at 62.14 versus US dollar. The dollar climbed against most of its 16 major counterparts after the US Fed’s taper decision.