Current account deficit seen widening in Oct-Dec

India’s current account deficit (CAD) may worsen for the third quarter of 2011-12, though respite is expected from inward remittances on a weakening rupee. During October-December, the rupee lost 8.4 per cent against the dollar.

The Reserve Bank of India (RBI) had stated in its mid-quarter monetary policy review that sluggish demand from advanced economies decelerated exports, while moderation in imports was less pronounced. Coupled with sticky crude oil prices, this is likely to keep CAD high.

CAD stood at 2.7 per cent of gross domestic product (GDP) in 2010-11. This year, the Prime Minister’s economic advisory council expects CAD to be 3.6 per cent.

India’s CAD was at $32.7 billion, or 3.6 per cent of GDP, at the end of the first half of 2011-12. Sonal Varma and Aman Mohunta, economists at Nomura, said in a report strong imports on higher inflation and inelastic oil demand had contributed to the widening CAD.

However, inward remittances are expected to be higher because of the rupee depreciation and uncertain global economic environment. At the end of the first half of 2011-12, personal transfers were at $15.7 billion, compared to $12.6 billion in the corresponding period of last financial year.

Rohini Malkani and Anushka Shah, economists at Citigroup, expect remittances to increase to $62 billion this financial year, from $53.1 billion in the previous financial year. They expect CAD to increase to 3.8 per cent.

According to RBI, the outstanding amount in bank deposit schemes for non-resident Indians stood at $3.3 billion in October-December, compared to $2.8 billion in the previous quarter. These included foreign currency non-resident accounts, non-resident ordinary rupee accounts and non-resident external rupee accounts.

The rupee fell from 53.07 a dollar to 48.97 in the third quarter. In December, it touched an all-time low of 53.75 against the dollar, following which the RBI stepped in with a slew of measures to arrest the downtrend.

The central bank disallowed cancelling and rebooking of forward contracts, and cut net overnight open limits of banks to wipe out artificial dollar demand from the foreign exchange market. It also lifted the caps on interest rates that Indian banks could offer on deposits to non-resident Indians.