India current account gap widest in four years as Fed looms

MUMBAI: India’s current account deficit widened sharply last quarter, a factor that could pressurise the rupee before an expected reduction in US stimulus in coming months.

The shortfall was US$14.3 billion April-June, or 2.4% of gross domestic product, the Reserve Bank of India said in a statement last Friday.

That compares with a median US$15.4bil deficit projected in a Bloomberg survey of 15 economists. The gap is the largest since the June quarter of 2013 and compares with the previous quarter’s US$3.4bil (0.6% of GDP) and US$0.4bil in April-June 2016 (0.1% of GDP)

India would need to attract bigger inflows to help bridge the wider deficit. However that’s now tougher because the economy is slowing and the Federal Reserve is expected to shrink its balance sheet, the details of which could be announced next week. A smaller US stimulus would curb investment into emerging markets. Many, including India, have already seen global funds buying fewer of their stocks and bonds.

It’s not all bad news though. India’s record foreign-exchange reserves could support the rupee, which has risen more than 6% against the dollar this year. More sustainable economic improvement however would need a recovery in exports. Shipments abroad rose about 4% in July, the slowest pace this year, while imports grew 15%.

“The next quarter will be challenging as the trade deficit has been widening till August," said Madan Sabnavis, chief economist at CARE Ratings Ltd. Support from foreign portfolio investments would be less strong as the flow to debt segment will slow down given that the limits are being reached.” — Bloomberg

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