CAD impact on rupee to be short lived

A near term weakening of the rupee against the dollar due to Current Account Deficit (CAD) rising to a record high of 6.7% of gross domestic product (GDP) in the December quarter is seen as a temporary by the market. 

 

Experts are of the view that even if the rupee touches the Rs 55 mark next week, it will stabilise as exports will pick up and the policy makers have said the deficit will be lower in the fourth quarter.

 

While yesterday the Finance Minister P Chidambaram assured that the CAD for the fourth quarter (January-March) is expected to be smaller, the Reserve Bank of India, during its mid-quarter policy in March also said CAD to improve in the current quarter though the deficit expected to remain significant.

 

Experts said that the growth story of the country is in tact and India is in a position to attract capital flows to support the rupee. “While exports have begun to recover, high import requirements, especially energy imports imply that the demand for dollar will remain high in 2013-14 as well. Hence, India will need the river of capital inflows to continue and provide support to the rupee,” said CRISIL Research in a report on Friday. 

 

CRISIL Research also believes that if the domestic reform momentum continues, India should be able to attract sufficient inflows to cover its CAD in the next fiscal. If however, there are any signs of a global economic drought, capital flows can dry up suddenly resulting in a temporary, but a sharp depreciation of the rupee.

 

The Finance Minister P Chidambaram on Thursday assured that the government is committed to bringing down the CAD. “If the current trend of improvement in exports and steadiness in imports persists, the CAD is likely to moderate from here.  The CAD for the fourth quarter is expected to be smaller. The Government is committed to bring down the CAD over time, as well as to ensure that it is financed safely,” said Chidambaram. In his statement in Delhi, he also said that steps have been taken to increase government and household savings, as well as facilitated foreign direct investment and foreign institutional investors investments. Both Reserve Bank of India (RBI) and the government will continue to monitor the CAD and will take additional steps whenever warranted.  

 

A fall in the rupee is seen very temporary after this statement which comes from the finance minister. “The CAD data does not help the rupee. But at the same time the statement of finance minister does help the rupee. The market will take some support from that due to this the rupee will not lose too much. I do anticipate an initial volatility but eventually there will be recovery on that account,” said Parthasarathi Mukherjee, president- treasury and international banking, Axis Bank.

 

However, RBI continues to be concerned about CAD. In the mid-quarter review of the monetary policy held earlier this month the central bank had said in the statement, “Risks on account of the CAD remain significant notwithstanding likely improvement in Q4 over an expected sharp deterioration in Q3 of 2012-13. Accordingly, even as the policy stance emphasises addressing the growth risks, the headroom for further monetary easing remains quite limited.”

 

But according to experts, the bigger concerns for the rupee is the dollar strengthening globally. “The macroeconomic numbers in US is coming extremely good due to which the dollar will strengthen among other global currencies. This would result in the rupee being weak,” said Abhishek Goenka, chief executive officer, India Forex Advisors.

 

The rupee had ended at Rs 54.28 against the dollar on Thursday compared with previous close of Rs 54.37.