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MUMBAI: India’s record current-account deficit threatens to weigh on the rupee and curb the magnitude of interest-rate cuts forecast to begin this month in support of government policies seeking faster growth.
The shortfall swelled to $22.31bn in the quarter ended September 30, the widest in Reserve Bank of India data beginning 1949. The rupee is down 6.1 percent against the dollar in the past three months, fanning price gains that will limit Governor Duvvuri Subbarao to a 25 basis-point rate cut on January 29, according to eight of 10 analysts in a Bloomberg News survey.
India has the biggest deficit among the largest emerging markets, stoked by the worst export slump since the 2009 global recession and gold imports that Finance Minister Palaniappan Chidambaram said are a “huge drain”. Trade and budget gaps have increased economic risks, the Reserve Bank said on December 28, even as the government tries to lure more foreign investment and limit subsidies as Asia’s No. 3 economy struggles.
“The widening current-account deficit indicates very severe macroeconomic threats,” said Rupa Rege Nitsure, an economist at Bank of Baroda here. “The central bank has less room to ease policy meaningfully.” Subbarao has left borrowing costs at 8 percent since a 50 basis-point cut in April 2012, resisting Chidambaram’s calls in October for a further reduction.
Still, the central bank signalled in a statement of the December 18 policy review that it may ease in 2013 as an inflation rate exceeding 7 percent cools. Two analysts in the Bloomberg survey predicted a 0.5 percentage-point cut in January.
The rupee weakened 1.1 percent, the most in two months, to 55.075 per dollar at the 5 p.m. close in Mumbai. The BSE India Sensitive Index climbed 0.1 percent. Five-year interest rate swaps advanced to 7.16 percent, the highest in more than a week, while the one-year rate rose as high as 7.6 percent, indicating investors pared bets on the extent of cuts in borrowing costs.
The deficit in the current account, which tracks goods, services and investment income, reached 5.4 percent of gross domestic product in July-to-September from 3.9 percent in the previous quarter. Exports slid for seven months through November. Gold imports accounted for more than two-thirds of the current- account gap on average in the last three years, the central bank said in its Financial Stability report last month. India also purchases about 80 percent of its crude oil from overseas.
The rupee will weaken about 7 percent to 59 per dollar by year-end, according to Nomura Holdings. Kotak Mahindra Bank predicts a drop to as low as 57 per dollar this quarter. Prime Minister Manmohan Singh curbed fuel subsidies in September and opened industries including retail to more foreign investment, seeking to steady the currency, revive growth and avert a credit-rating downgrade that may disrupt capital inflows.