Few would dispute policy-makers' achievement in reducing India's external imbalances, but the unprecedented release of the balance of payments (BoP) data nearly a month before schedule may not yet present the total picture.
Little wonder that the Indian rupee, which bore the brunt of high external imbalances, hardly gained. In fact, it fell four paise to the US dollar. If high current account deficit (CAD) and overseas consumption improved, the obvious move for the currency was up.
There is more to the BoP numbers than what meets the eye. It indeed appears that the cause of the rupee's decline to lifetime lows in August need not necessarily have been due to the Federal Reserve's much feared tapering, but probably because of India's heavy external debt. The CAD crashed to 1.2% of the gross domestic product from 5% a year earlier. It is down from its highest ever of 6.7% in the quarter-ended December 2012, thanks to restrictions on gold imports, which accounted for nearly half the CAD and a surge in exports due to the recovery in the West.
But what's actually hidden is the pressure of overseas loan repayments. Years of credit binge overseas because of the interest rate arbitrage could well begin to play spoilsport when merchandise trade is beginning to balance itself.
Net capital outflows, including portfolio flows, foreign direct investment, and commercial borrowings, surged to an all-time high in the September quarter to $5.38 billion. This is higher than the quarter following the September 2008 collapse of Lehman Brothers when the global credit markets froze.
Feeding the high current account deficit through capital flows, especially higher borrowing by Indian corporates, which at that time made sense, may begin to bite eventually. India's total overseas debt stands at 136% of the foreign exchange reserves as of June-end 2013. Of this, short-term debt maturing within the next 12 months stands at $96 billion.
"Our policy-makers are focussing on ways of financing the current account deficit, but not looking at ways to curtail it," says forex consultant AV Rajwade. "(Having said that) there has been some efforts being made to reduce the official gold imports."
After the current account deficit went past 5%, the government and the RBI swung into action by raising import duty and restricting imports of the precious metal by mandating minimum re-exports.
Gold imports in the July-September quarter fell to 148.2 tonnes from 219.1 tonnes in the year-ago period. For the fiscal year, it is forecast to fall to about 900 tonnes from 1,000 tonnes in 2012.
Window for Smuggling
The physical gold imports data may be encouraging, but the window for smuggling may be just getting wider. It is not that policy-makers are not aware of it, but may be under the belief that even if smuggling rises substantially, it could hardly match even a quarter of imports through official channels.
Gold smuggling has gone up. Estimates are that between January and October, the number of seizures were high at 579, and valued at Rs 153.20 crore. This does have implications on the balance of payments. Gold smuggling is financed through remittances and the hub of gold smuggling is Dubai.
Beyond the seizures by a system that is known to be corrupt, anecdotal evidence suggests that remittances from overseas Indians are sliding as smuggling may be funded through Indians living abroad.
Though there is no firm data, reading of other numbers suggest that net quarterly private transfers have dipped in the September quarter by $500 million, to $16.2 billion.
That may also be partly due to the fact that the central bank opened a liberal window of deposit swap under the so-called FCNR (B) which raised $34 billion.
Bank of America Merrill Lynch's chief economist Indranil Sengupta estimates about a third of it is likely to have cannibalised other modes of cash flows.
Tapering effect
Lower current account deficit and the record mobilisation of deposits from the special window have led to the rupee rallying more than 10% from its lows, but that does not mean that India is completely out of the woods yet. The increased possibility of the tapering bond purchases by the Federal Reserve after US third-quarter GDP growth was raised could still create a ripple in the Indian currency market.
"Early tapering could push the Indian rupee back to 68/$ levels as the import cover, at 7.5-8 months, remains below the 8-10 months needed for INR stability," says Bank of America's Sengupta.
The prospects of Bharatiya Janata Party's Narendra Modi, becoming the prime minister next year, is aiding sentiment for the time being.
In fact, a clearer picture may emerge from what the RBI has not released - the external debt statistics and net international investment position which usually is released simultaneously with the CAD numbers. That may be on December 31.
Source:- economictimes.indiatimes.com
