WSJ:India Current Account Deficit to Weigh on Rupee
By MUKESH JAGOTA And ANANT VIJAY KALA
NEW DELHI – India's wide current account will keep the local currency under pressure, a member of two top government advisory panels said.
The threat will recede only when the gap shows signs of narrowing to 2.5% of gross domestic product, Saumitra Chaudhury, a member of the Planning Commission and the Prime Minister's Economic Advisory Council, said late Monday.
The Indian rupee fell to a 10-week low against the U.S. dollar Monday, reflecting concerns over the current account deficit, which is expected to be 3.6% in the year to March 31. The gap was 2.6% last fiscal year.
"If you are going to have a current account deficit of around 3.0% of GDP, you will have the rupee under pressure," Mr. Chaudhury said. "It's not that we cannot finance [the] current account deficit, but people are very nervous about anything above 2.5%."
The rupee is under pressure also due to slowing foreign fund inflows into local stocks, with global economic uncertainties making investors wary of emerging markets.
Although the rupee is roughly 4% up against the dollar in 2012 after dropping about 16% in 2011, analysts say the gains are largely due to measures by the Reserve Bank of India to attract foreign investment. The steps are unlikely to improve the medium-term prospects of the rupee, which was last trading at 50.94 to the dollar.
Mr. Chaudhury said rising gold imports have also been driving the current account deficit.
India imported about $59 billion worth of gold this fiscal year, compared with $41 billion last year, Mr. Chaudhury said.
Indians traditionally buy gold jewelry during weddings and festivals. They are also increasingly buying gold as an investment.
The government this month doubled the import duty on gold to partly discourage consumption.
Mr. Chaudhury also said inflation remained uncomfortably high. "If you are a maturing economy, 6.0%-6.5% inflation is too high."
The wholesale price index-based inflation rate was 6.95% on year in February, far higher than the central bank's comfort level of 5.0%.
The RBI has often blamed the government's wide fiscal deficit for fanning inflation. It has maintained a tight monetary policy stance despite calls to cut interest rates to boost growth.
Policy reforms are needed to clear economic bottlenecks, and lowering interest rates alone may not be enough to revive growth, Mr. Chaudhury said.
Write to Mukesh Jagota at mukesh.jagota@dowjones.com and Anant Vijay Kala at anant.kala@dowjones.com
