'India current account deficit at record'.

Mumbai: India's current deficit may soar to a record high in the September quarter on high non-oil imports after briefly narrowing in the June quarter, which could make the rupee susceptible to a sudden reversal in capital inflows, Nomura said.

Economists with Nomura said in a research note they expect the current account deficit to be at an all-time high of 4.9 percent of gross domestic product in July-September, surpassing its previous high of 4.5 percent in the March quarter.

However, in the April-June period, the current account deficit had narrowed to 3.9 percent of GDP at $16.55 billion.

Foreign investors who had pumped in about $12.6 billion in the March quarter turned cautious and dollar inflows came down during April-June following a deteriorating trade balance, slowing economic growth and an environment of policy inaction.

Since July, foreign investors have brought in $10.6 billion, of which about $8 billion came in after the new Finance Minister Palaniappan Chidambaram made a series of announcements to liberalise the economy and kick-start reforms.

A surge in portfolio inflows due to recent reforms has ensured that net capital inflows are enough to finance the widening deficit, Nomura said.

However, with the current account deficit at a record high, we worry the INR remains susceptible to a sudden reversal of flows and note that the recent real effective exchange rate appreciation could worsen the underlying imbalance.

The rupee rose to a near six-month high of 51.32 to the dollar earlier in October mainly on the back of reform moves by the government to give a fillip to growth. It, however, fell last week, posting its biggest weekly loss in three-and-half months, as the immediate impact of the reforms fade.

Nomura sees July-Sept CAD at record high of 4.9%

(PTI) Leading brokerage Nomura today warned that the current account deficit (CAD) might have soared to a new record of 4.9 per cent of GDP in the July-September quarter due to high non-oil imports.

If the assessment turns out to be true, it will be 40 basis points higher than 4.5 per cent CAD the country had in the fourth quarter of last fiscal, coming after sharp fall in the April-June quarter when it improved to 3.9 per cent of GDP to USD 16.55 billion, on slowing gold and other imports.

The report cites the sharp deterioration in the trade deficit as the main reason for this plunge, and warned that it could make the rupee susceptible to a sudden reversal in capital inflows.

Nomura India Chief Economist Sonal Varma and Economist Aman Mohunta in a research note said they "expect the current account deficit to be at an all-time high of 4.9 per cent of GDP in the quarter to September, surpassing its previous high of 4.5 per cent in the March quarter.

"A surge in portfolio inflows due to recent reforms has ensured that net capital inflows are enough to finance the widening deficit."

However, it warned that "with the CAD at a record high, we worry the rupee remains susceptible to a sudden reversal of inflows, which could lead to a reversal of the recent real effective exchange rate appreciation that can worsen the underlying imbalance".

It can be noted that in the run-up to the budget, foreign investors had pumped in around USD 13 billion into the country in the March quarter but got spooky after budget proposals to introduce Gaar and retro-tax measures following which the dollar inflows came down during the June quarter.

The worst impact of this was on the rupee which in the middle of June had hit a life-time low of 57.13 against the American dollar.

However, since July, foreign investors pumped in about USD 11 billion, of which USD 8 billion came in after Finance Minister P Chidambaram made a series of announcements to liberalise the economy and kick-start reforms.

The rupee touched 6-month high of 51.32 earlier this month following the rush of fiscal and policy reforms since the middle of last month. The government clamped down on LPG subsidies apart from hiking diesel prices by 13 per cent, besides allowing foreign direct investment into retail, aviation and media sectors.

According to monthly customs data, the trade deficit widened to 12.2 percent of GDP in Q3 of FY12 from 9.7 percent in Q2, Nomura said.

The report further noted that "while oil prices have risen, most of this worsening is in the non-oil segment. We estimate that the oil trade balance has remained broadly unchanged (at -6.1 percent of GDP in Q3), while the non-oil trade balance has worsened to -6.1 percent of GDP from -3.3% in Q2".

Source : financialexpress.com