4.3% CAD on fall in exports, services priced-in by mkt

The current account deficit (CAD) for the full year of FY12 is at 4.3% of GDP, which is unusual and an all-time high. The RBI for the past 20 years found it tough to rein in current account deficit within 3%.

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The Prime Minister's Economic Advisory Council in February, March, April and during the credit policy, thought that it would be just a tad above 3%, but 4.3% is quite big.

Of course, the polls threw up expectations of 4.5% though the average was set at 4.25%. It indicates an ugly scenario and the only consolation is that the market already expected this even if the government economists pretended otherwise.

The market geared up for a 4.3% current account deficit and priced it in to send the rupee all the way to 57. So it's not as if there will be any fresh onslaught on the rupee, but that is the reality.

The reasons are not far to seek. The last quarter was quite bad in terms of performance. Exports fell by about 3.4% whereas imports registered a growth of 22.6%. Low export growth widened the trade deficit to USD 51.6 billion. Services export, led  by software services unfortunately decelerated to 21% from 24-25%.

Other reasons include the high amount of money that Indians living abroad cashed in or transferred to India.

Overall, it was largely the difference between exports, imports and the slight deceleration in software exports that has led to the huge trade deficit for the fourth quarter at USD 51 billion and for the full year at f USD 189 billion.

Capital outflows fell to about USD 20 billion. The BoP data contains many other elements for analysis, but the important part is that the current account gap is at USD 78 billion which amounts to 4.3% of the GDP.