Here's why better CAD not to help rupee much

Moneycontrol Bureau

The easing current account deficit (CAD) may not spell cheers for the tumbling rupee agains the US dollar. However, major policy initiatives are required to attract more dollar inflows, which in turn, can stem rupee's freefalling.

"While the BoP print is certainly favourable, we think it will not offer much cheer for the INR. The sharp sell-off in the Indian currency against the USD over the past month has so far sparked little reaction from policymakers," Siddhartha Sanyal and Rahul Bajoria, econmists from Barlays Bank said in a note on Thursday.

Also read: Facts you need to know about RBI's current account data

The easing current account deficit, according to them, should not have come as a major surprise as the improvement in the merchandise trade deficit in Q4 12-13 (USD46 billion from USD58 billion in the previous quarter) was largely known beforehand, and invisible inflows typically demonstrate a strong seasonal pattern in the January-March quarter,

"Current account gap likely lower in FY 13-14, but financing will still not be easy. Notwithstanding this better data print and weak domestic demand in the recent past, the FY 12-13 current account deficit remained elevated at 4.8% of GDP, though a tad lower than our expectation of 4.9%," they said.

India’s current account deficit for the quarter ending March came in at USD18.1bn, better than expectations. Barclays was expecting it at USD20 billion and markedly lower than the previous quarterly print of USD31.8bn. Accordingly, the current account gap improved sharply to 3.6% of GDP from 6.7% in the previous quarter.
 
Some key takeaways the report:

Near term policy initiatives critical for INR

Of late, the central bank seems relatively less averse to intervening in USD/INR. However, we feel that intervention alone might not be effective to help the INR stabilise, especially given the current volatile global backdrop.
In our view, even though the current account deficit will likely improve slightly in the coming quarters, financing it will remain a challenge, especially if Fed tapering expectations continue to rise.

USD-denominated bonds targeting NRIs remain the most potent near-term option.

As such, we think there is a need for continued policy initiatives to attract capital inflows. Against the current backdrop, we see several possible policy responses:

Further liberalisation of FDI rules are possible in the coming weeks. While a positive move over the longer-term, such changes are unlikely to yield quick results.

Further efforts to curb gold imports might be attempted

The government is expected to eventually issue (quasi) government bonds in foreign currency such as the Resurgent India Bonds or India Millennium Deposits issued in 1998 and 2000, respectively.

A potentially chunky inflow under such schemes might be effective in supporting the INR in the current environment. This remains the most potent near-term option, in our view.