India's current account vulnerability falls, but risks remain

Measures to curb demand for imported gold have contributed to a sharp narrowing of

RELATED ARTICLES

India's current account deficit, global consultancy firm Capital Economics said.

"This should make the rupee less vulnerable to shifts in global investor sentiment," it said in a report released today.

Preliminary balance of payments data published on Monday showed that the current account deficit fell to USD 5.2 billion in the July-September quarter of 2013-14, or 1.2 per cent of GDP.

"The decrease was due to a pick-up in exports and a slump in gold imports, it noted.

Gold imports have risen substantially over the past decade from $5 billion in 2003 to over $ 50 billion in 2012, it said.

"India's affinity for gold is partly cultural but a desire to hedge against inflation has also played a role," the report said.

The decline in gold imports was the result of policy changes, such as a requirement to re-export 20 per cent of imported gold and a doubling of import duty, that were introduced to make India less vulnerable to any shift in foreigners' willingness to fund India's deficit spending.

"These moves, so far anyway, have proved extremely successful," it said.

Thanks to weaker gold demand, India was able to accommodate outflows without cutting spending elsewhere or drastically running down its foreign exchange reserves, the report said.

Looking ahead, reduced dependence on foreign financing should leave India far less vulnerable to any shift in global investor sentiment.

The rupee should be more stable as a result, it said.

But a few caveats are in order.

First, the current account can be volatile from quarter to quarter.

"Appetite for gold may also return. Some imports may just have been deferred on anticipation that the government might reverse its crisis-response policies," it said.

Certainly, over the last decade, higher domestic gold prices have over the medium term gone hand-in-hand with higher demand, so the policy measures which have pushed up domestic prices may not restrain demand indefinitely.

With consumer price inflation at 10 per cent, the appeal of gold as a hedge against inflation remains intact, it said.

Meanwhile, it remains uncertain how committed the government is to reining in the deficit when this goal conflicts with other priorities, the report added.

"It has been half-hearted at best in its efforts to rein in the budget deficit," it said.

"The risk of fiscal largesse by an unpopular government, which would prop up both the fiscal and current account deficits, remains high in the near term as elections approach," it said.

Post new comment

E-mail ID will not be published
CAPTCHA
This question is for testing whether you are a human visitor and to prevent automated spam submissions.

EDITORIAL OF THE DAY

  • The economic survey falls in step with the BJP’s election manifesto

    It’s always tough to find something wrong with the annual economic survey as it only articulates the government’s desire to set its house in order

FC NEWSLETTER

Stay informed on our latest news!

INTERVIEWS

GV Nageswara Rao

MD & CEO, IDBI Federal Life

Timothy Moe

Goldman Sachs

Chander Mohan Sethi

CMD, Reckitt Benckiser India

COLUMNIST

Arun Nigavekar

Why higher education needs innovation

India is such a great country that it creates complexity ...

Zehra Naqvi

We must overcome the fear of death

It is the biggest irony that the only thing that’s ...

Dharmendra Khandal

Jawai leopards and locals can coexist peacefully

At first glance, the Jawai landscape seems like a large ...

INTERVIEWS

William D. Green

Chairman & CEO, Accenture