India’s current account deficit widened from last quarter, with potential to hurt the rupee before an expected rise in interest rates by the U.S. Federal Reserve next week.
- The shortfall was $13.5 billion in October-December, or 2 percent of gross domestic product, the Reserve Bank of India said in a statement in Mumbai on Friday
- That gap was narrower than a median $15.85 billion deficit projected in a Bloomberg survey of 14 economists
- The current account gap is wider than the previous quarter’s $7.21 billion deficit (1.1 percent of GDP), and higher than $8 billion recorded in October-December 2016 as trade deficit widened
India’s current account deficit widened on the back of a rising trade gap. According to government data, trade deficit expanded to nearly $43 billion in the October-December period from $32 billion in the July-September period. The wider trade deficit was partially on account of higher crude oil prices that averaged $63/bbl in the October-December quarter, up from $50/bbl in the previous quarter, according to Teresa John, economist at Nirmal Bang Equities Pvt. Ltd.
While India needs steady inflows to help bridge the deficit, foreign investors turned net sellers of stocks in December after buying in October and November. Nevertheless, with foreign exchange reserves of more than $400 billion, India’s external finances are likely to offer some cushion to the rupee which is the second-worst Asian currency so far this year.
Expectations of at least three rate hikes by the Federal Reserve could weigh on the high-yielding rupee.
“Portfolio flows would be pressured if the Fed would have to hike faster than markets have anticipated. We expect three hikes to take place in March, June and September 2018, but the market has also been speculating about four hikes,” said Hugo Erken, senior economist at Rabobank.
- Net services receipts increased to $20.9 billion, higher than the previous quarter’s $18.4 billion — and up from the previous year — mainly on the back of higher earnings from software services and travel, the RBI said
- Remittances were at $17.6 billion, up nearly 16 percent from the previous year; while net foreign direct investments moderated to $4.3 billion from $9.7 billion a year ago
- The goods trade deficit widened to $44.1 billion from a gap of $33.3 billion the previous year
- Net portfolio investments recorded an inflow of $5.3 billion, compared with an outflow of $11.3 billion last year as foreigners bought Indian stocks and bonds