Current account deficit falls to 3.6 per cent of GDP, but fails to lift rupee

MUMBAI: The RBI broke decades-old tradition on data releases to supply good news to a nervous market when it unveiled better-than-forecast numbers on the external economy on Thursday, two days ahead of schedule. But its impact was muted given the turning global liquidity tide and a sputtering economy.

The current account deficit, the excess of spending overseas than earnings, fell to 3.6% of the gross domestic product in the March quarter, showed data from the Reserve Bank of India. That's lower than the revised 6.5% in the December quarter, limiting the fiscal year deficit at 4.8% of the GDP.

The battered rupee rose to Rs 60.15 to the US dollar, from a record low of Rs 60.76 on Wednesday. The currency slide is due to the exit of some international investors who see better opportunities in the US, where yield on benchmark treasury has climbed a percentage point recently and stocks are at record highs.

"The earlier-than-scheduled release of the balance of payments data probably reflects the Reserve Bank of India's attempt to calm the market after the plunge in the Indian rupee to a record low," said Mole Hau, economist at BNP Paribas.

"However, with the CAD likely to re-widen and exchange rate policy lacking a solid backing from reserves, the INR is at risk of suffering further if global risk appetite continues to retreat," said Mole Hau, economist at BNP Paribas. The RBI and the government have been rolling out measures to arrest the fall of the currency, including intervening in the currency market, which is down 11% since May 1. Ben Bernanke's hint that he may withdraw quantitative easing, or QE3, by the end of the year has led to flight of capital from emerging markets. Poor outlook on Indian corporate earnings and stall speed economic reforms ahead of elections are adding to woes of international investors.

The CAD at $18.1 billion is much lower than the consensus estimate of $21 billion and the previous quarters' $31 billion. Unlike in the past, net invisibles largely comprising service incomes and remittances by Indians abroad declined 7.7% from a gain of 27.5% a year ago. "Financing the current account deficit this year will be the key challenge, as not only are there risks from lower portfolio inflows, but debt inflows such as short-term trade credit also suggest caution," said Sonal Varma of Nomura Securities.

Overseas investors have sold at least $6.6 billion of Indian stocks and bonds in June. With the cost of funds rising in international markets, Indian companies' overseas borrowing could fall and reduce the US dollar inflows.