Forex reserves 'growth may slowdown': IEG

India's foreign exchange reserves, now at $100.05 billion, is expected to reach $104 billion by March, but its high growth may slow down due to rising trade deficit, according to the Institute of Economic Growth (IEG).

"We expect further accumulation of (forex) reserves and to reach $104 billion by the end of March 2004," IEG said in a latest monthly report, reasoning that huge inflow of foreign institutional investments and high interest rate differentials had helped the reserves to rise.

However, "the rising trade deficit may hamper the current high growth of reserves in the coming months," the economic think-tank said, adding trade deficit increased by 107.9 per cent during April-October this year compared with the levels in the year ago period.

Exports grew by 8.44 per cent, while imports surged by 21.46 per cent during the first seven months of this fiscal, leading to a widened trade deficit, IEG said, expecting that exports would maintain an average 5.0 per cent growth while imports were set to rise by 13 per cent for the next three months.

Expecting that positive sentiments in the economy would set FII inflows, the report said the recent decision of S&P's upgrading of India's foreign currency rating from negative to stable, would boost the pace of inflow of FII investments in the "buoyant" domestic financial markets.

Citing that excess liquidity in the economy, IEG said it expected further decline in short-term interest rates.

"We forecast a marginal decline in the prime-lending rate (PLR) from its existing rate of 10.5 per cent in the next three months," it said.

On the exchange rate, it said the rupee was likely to depreciate further due to recovery signals in the US economy and Reserve Bank's decision to maintain the current interest rate structure when the market was expecting a reduction in benchmark bank rate.

In addition, it said, the increase in trade deficit might have increased the demand for dollar and thereby leading to depreciation of exchange rate.

"We expect further depreciation of exchange rate due to expected rise in trade deficit and also rise in international interest rates," the report said.

It cited the recent instances of increased interest rates in the UK, Japan and Germany.

The Delhi-based institution also said domestic money supply growth was expected to decline marginally even after high forex accumulation and credit off-take.

On the inflationary trend in the economy, it said the WPI inflation would be below 5.0 per cent mostly due to expected decline in prices of primary articles and oil.

It said the expected spurt in the commodity production (both agricultural and industrial output) and expected decline in money supply would lead to reduction in inflation in the coming months.

Though apprehensive of rising international oil prices due to higher winter demand from the US, IEG said, "If Opec (Oil Producing and Exporting Countries) decides to increase the oil supplies to meet the demand, then we may expect a fall in the prices in the coming months."