CAD's impact on rupee to be short lived: Experts

Say the current account deficit would be lower in the fourth quarter as exports expected to pick up

The weakening of the rupee against the dollar after the current account deficit (CAD) rose to 6.7 per cent of gross domestic product (GDP) in the December quarter could be a temporary phenomenon, according to experts.

The rupee had ended at Rs 54.28 against the dollar on Thursday, compared with previous close of Rs 54.37. Even if the rupee touches the Rs 55-mark next week, it will stabilise as exports will pick up, said experts. Policy makers, too, are of the opinion that CAD will be lower in the fourth quarter (January-March). Yesterday, Finance Minister P Chidambaram had said CAD for the fourth quarter is expected to be smaller.

According to experts, India's growth story is on track and the country 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 dollars 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. If the domestic reform momentum continues, then India would be able to attract sufficient inflows to cover its CAD in the next fiscal, the report noted.

However, if 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.

"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. He added that steps have been taken to increase government and household savings, as well as to facilitate foreign direct investment and foreign institutional investors investments.

Both the 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 the 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 the CAD. In the mid-quarter review of monetary policy earlier this month, the central bank had said, "Risks on account of the CAD remain significant notwithstanding likely improvement in the fourth quarter over an expected sharp deterioration in the third quarter 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 concern for the rupee is the dollar strengthening globally. "The macroeconomic numbers in the 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.