Samiran Chakrabarty, Head-Research, StanChart Bank has felt for a while now that the apprehension of the market on CAD is misplaced. This argument gains ground on the November trade deficit data that declined to USD 9.22 billion from USD 10.56 billion in October and USD 17.2 billion in the year-ago period.
“Even if we maintained last year's numbers we would still have CAD at only USD 40 billion,” he told CNBC-TV18. He says it would be surprising if CAD was higher than USD 45 billion. However, he had expected marginally higher export numbers.
But for now, he says, the market has digested this good news on the trade deficit/CAD. The primary focus is now on the two event risks of QE taper and the political outcome of the elections. "So the broad range of 61-64 (for the rupee) will be broken only if these two event risks play in a kind of a disruptive fashion," he told the channel.
Below is a verbatim transcript of the interview on CNBC-TV18
Q: What are we heading in terms of a current account deficit (CAD) if it is as good a number in December as well?
A: I have repeatedly said that we have misplaced apprehension on the CAD for FY14 for the markets. But having said that, we are heading towards about USD 160 billion or a tad less than that on the trade deficit number for the full year. That should mean that our CAD forecast of about USD 45 billion for the year looks okay. If at all the risk is on the downside, we will see the lower number. The policy establishments are also now accepting that the CAD number will be lower than 3 percent of GDP. So, overall, a very positive number.
It shows that the momentum of the trade deficit reduction is continuing. What I worry a bit is that I would have expected export numbers to be marginally higher. So the talk that we are getting about auto exports slowing down on the back of quantitative restrictions in certain countries, whether that is affecting this number or not is something which we will have to see.
Q: Since you are perhaps having the lowest CAD number out there, I think you are going with USD 45 billion as the gap do you think we are going to do even better than that? This is USD 10 billion last October and USD 9 billion November. Even assuming USD 10 billion in December you will come to about less than USD 30 billion trade deficit. We know that two of the invisible flows do not change. We get USD 16 billion in software and USD 16 billion in Indians leaving abroad and sending money in private transfers. So even if you takeaway that normal USD 6-6.5 billion of interest payment, we are still looking at a CAD of only USD 5 billion max for this quarter as well. Are we going to be at a 2 percent CAD this year?
A: Let me put the maths in front of you. It is very simple actually. For the first 8 months of trade deficit data that we have got, we got about USD 101 billion of trade deficit in 8 months. You add USD 10 billion of trade deficit for rest of the four months; you get to about USD 140 billion. You add to it about USD 10-15 billion of defense imports, you go to about USD 150-155 billion of trade deficits. Last year the invisibles component was USD 116 billion. So even if we maintained last year's numbers we would still have CAD at only USD 40 billion.
So as I said there is downside risk to my USD 45 billion forecast for CAD. I will be very surprised if the CAD is higher than USD 45 billion. If this becomes the trend in the next four months then we could see that trade deficit number itself jumping up from USD 10 billion mark and that could pose risks.
Q: The other number that has come gold: USD 1.05 billion. Now all the numbers are there. We only have to deduct to get non-oil, non-gold number.
A: I had a small point on the oil import part. I think it is a bit of a technical correction that you are seeing, so for the first half you had volume growth in oil imports of 9 percent against consumption demand for most of the products in negative. So I am suspecting that there was an inventory build up on oil for the first half of the year and that is why I am anyway expecting the second half oil demand to be weaker than the first half.
Q: The non-oil, non-gold number has come in at USD 20.89 billion, that is down 23 percent. Non-oil imports were also down 23 percent in November to USD 22.5 billion at that time. It is 23 percent down yet again. So a quick comment on that and then I want your direction on the rupee.
A: The causality is very important here. The drop in non-oil, non-gold import would lead to probably slower growth going forward. The question that we were grappling with for a while earlier in the year was that why is it that non-oil, non-gold import is not coming down when growth is so slow.
Now we should be happy that finally the causality is catching up and because of the growth slowdown the non-oil, non-gold import is also slowing down and part of this could also be the exchange rate effect which at this point of time will be difficult to discern. I would say that this is the bulk of the correction.
This is the kind of an automatic stabilisation mechanism through lower growth and currency depreciation that we are seeing on the trade deficit side. I do worry about the growth implications, but probably I am more happier with the trade deficit number than worrying about the growth.
Q: What is the rupee level by March or December?
A: The market has digested this good news on the trade deficit/CAD. The primary focus is now on the two event risks of QE taper and the political outcome of the lections. So the broad range of 61-64 will be broken only if these two event risks play in a kind of a disruptive fashion.
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