Current Account Deficit Triples as Imports Soar.

MUMBAI: India’s tripled in the June quarter as imports soared, raising the spectre of volatile currency when the tide of overseas fund flows turns.

Interest rate differentials between the domestic market and the developed nations raised the external debt too as companies found it beneficial to borrow in dollars. Widening deficit may make the central bank’s job of ensuring stability in the foreign exchange market, inflation and interest rates tough, economists say.

Current account deficit in the June quarter widened to $13.7 billion, from $4.5 billion in the year earlier, a data released by RBI showed. Current account in the balance of payments measures the net position of a country’s exports and imports of goods and services.

“RBI has a tough task striking a balance between inflows, exchange rate and controlling inflation,” Bloomberg News quoted Rahul Bajoria, a Singapore-based economist at Barclays as saying. “The deficit will increase the headwinds and lead to a weakening of the rupee in the short term.”

Cheap money sloshing around the globe is finding its way to developing nations including , pushing up local currency values. This leads to higher imports while exports stagnate due to consumer reluctance in the West to spend because of rising unemployment. Although foreign fund flows into India, expected to be an all-time high of $25 billion this year, are pushing up stock prices, they are hurting exports and may shake the economy when overseas investors pull their money out.

The trade deficit was higher at $34.2 billion during the quarter compared with $25.6 billion during the year earlier. While rising imports are an indication of strong demand that could help the country achieve 8.5% growth, a sustained deficit could undo the achievements so far, say economists.

“Risks of a near-term shock over the BoP remain,” Chetan Ahya, Asia-Pacific economist at wrote in this paper recently. “Policymakers have, in effect, taken on more risk in pushing growth and the remaining exposed to the risk of a rise in oil prices above $90/bbl and global risk aversion affecting capital inflows into emerging markets. Under either of these conditions, the currency could depreciate and short-term interest rates spike up, hurting investment and growth — precisely the areas policymakers are aiming to accelerate.’’

The government recently raised the limits of corporate and government bonds holding by foreigners. Services surplus fell to $20.5 billion, from $21.2 billion a year earlier due to slowdown in non-software services and investment income, largely comprising returns from deploying foreign exchange reserves. Companies borrowed more from overseas markets exploiting interest rate discrepancies.

Net short-term trade credit was $5.6 billion, up from $1.5 billion, in line with increasing imports, the data showed. Overseas borrowing turned positive at $2.7 billion during the quarter. It declined $0.4 billion a year earlier. The overall balance of payments that includes both the current as well as capital account transactions for the quarter, ended in a higher surplus of $3.7 billion ($115 million) on account of a capital account surplus of $18.3 billion ($4 billion). Capital inflows improved on back of sharp surge in short-term trade credits, external commercial borrowings (ECBs), external assistance and banking capital.

Source : economictimes.indiatimes.com