Millennium Post

CAD worries back to haunt govt on fiscal prudence

Leading brokerage Nomura on Thursday warned that the current account deficit [CAD] might have soared to a new record of 4.9 per cent of GDP in the July-September quarter due to high non-oil imports.

If the assessment turns out to be true, it will be 40 basis points higher than 4.5 per cent CAD the country had in the fourth quarter of last fiscal, coming after sharp fall in the April-June quarter when it improved to 3.9 per cent of GDP to USD 16.55 billion, on slowing gold and other imports.

The report cites the sharp deterioration in the trade deficit as the main reason for this plunge, and warned that it could make the rupee susceptible to a sudden reversal in capital inflows.Nomura India chief economist Sonal Varma and economist Aman Mohunta in a research note said they 'expect the current account deficit to be at an all-time high of 4.9 per cent of GDP in the quarter to September, surpassing previous high of 4.5 per cent in last quarter.

‘A surge in portfolio inflows due to recent reforms has ensured that net capital inflows are enough to finance the widening deficit.’

However, it warned that 'with the CAD at a record high, we worry the rupee remains susceptible to a sudden reversal of inflows, which could lead to a reversal of the recent real effective exchange rate appreciation that can worsen the underlying imbalance'.

In the run-up to the budget, foreign investors had pumped in around USD 13 billion into the country in the March quarter but got spooky after budget proposals to introduce GAAR and retro-tax measures following which the dollar inflows came down.
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