India’s current account crisis weakens Rupee

May 7, 2012 · Author: · Category: business, exim 

India’s high import demand for petroleum (which is nearly price inelastic) and gold (driven by a shortage of investible asset classes in a high inflation environment) are primarily responsible for India’s burgeoning import bill. In fact, adjusting for India’s imports of Petroleum products and Gold would turn India’s current account deficit (CAD) into a hefty current account surplus.

Things Look Gloomy for FY 2013 – Despite a large merchandise import bill, high exports’ growth and a moderate capital account surplus have shielded India’s balance of payments in FY12. Exports growth in India is likely to weaken to 10% YoY in FY13 from 20% YoY, mainly on account of a recession in Europe (which accounts for one-fifths of India’s merchandise exports) and an unwinding of overstated exports data which held up until now despite lower growth in advanced economies.

The fading of exports growth coupled with the persistence of high gold import demand is likely to lead India’s current account deficit to widen further to 4.4% in FY13. Assuming, even if the RBI decides to intervene decisively to save the falling INR, the fact that the size of the BoP balance is far more powerful driver of INR movement (i.e 8x times more powerful than RBI intervention), we expect the INR to depreciate further and head towards 55-56INR/USD over the next 12 months.

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