CAD will reduce below $70 billion: Rangarajan

Stating that there has been improvement in the trade account, Chairman of the Economic Advisory Council to Prime Minister C Rangarajan on Tuesday said the Current Account Deficit (CAD) will go down well below $70 billion.

Pointing out that in August and September, India's exports showed a double digit growth rate, Rangarajan said at an event here that India's trade deficit in the first half of this year was $80 billion as compared to $92 billion in the previous year.
If the present trend in exports and imports continue, the overall CAD will reduce even lower than $70 billion.

Noting that the Indian rupee over the last few weeks had remained stable at around 61-62 against the US dollar, he said the rupee was well corrected for inflation differential.

Referring to the USA's indication of tapering on May 22 and the resultant fall in capital flows, he said this affected capital inflows not only to India but to all the emerging economies including Brazil as investments were moved to the USA.

However, now, there has been a change and investments flows have turned positive, he said.

Finance oil imports via ECBs, Chidambaram tells Moily PTI

	Finance Minister P Chidambaram has dubbed Oil Minister M Veerappa Moily's claim of cutting 3 per cent in oil import bill through fuel conservation as "ambitious" and has suggested that more oil imports need to be financed through overseas borrowings to help cut current account deficit (CAD). Moily is set to launch a six-week mega fuel conservation drive on Tuesday, attempted to taper demand, thereby cutting oil import bill by $2.5 billion. He had outlined the drive as well as other measures in a letter to Prime Minister Manmohan Singh and Chidambaram on August 30 saying his initiatives would help save $20 billion in foreign exchange outgo. Responding to Moily's letter, Chidambaram wrote back last week saying the projected savings of foreign exchange on account of various measures proposed are optimistic, official sources said. "While it is recognised that a conservation campaign might result in some reduction in petro-product consumption, the estimates of savings projected at 3 per cent, over and above the proposed crude imports cut, appear to be ambitious," the finance minister wrote. Stating that only $3.75 billion out of the total crude oil import bill of over $160 billion is proposed to finance through External Commercial Borrowings (ECBs), Chidambaram said the possibility of increasing the ECB mode of financing should be explored. India paid about $144.29 billion last financial year for importing oil and this year the outgo is projected at $160 billion. Besides fuel conservation, Moily wants increase in crude oil imports from Iran, which is paid in rupee and will help curtail foreign exchange outgo. Chidambaram also wanted oil companies to be "encouraged to import crude oil from Iran in greater quantities and their imports from Iran be reviewed regularly". As US and western sanctions have blocked all payment routes, India pays Iran in rupees in a Uco Bank branch in Kolkata. Buying more oil from Iran would mean it pays more rupees than dollars it has to pay to other sellers. Sources close to Moily said the conversation drive - which includes the minister and his officials using public transport at least once a week - is aimed at sending a message for conservation down the line. Also, it is aimed at bringing about change in people's mindset and to act as a catalyst in improving public transport system. The government, meanwhile, is grappling with high CAD, the gap between inflows and outgo of foreign exchange. It has set a target to bring down the CAD, which touched a record high to 4.8 per cent of GDP last financial year, to 3.7 per cent level in the current financial year. Moily's other measures included asking state-owned oil firms to keep crude imports at 2012-13 level of 105.96 million tonnes that will save $1.76 billion in foreign exchange. The mega fuel conservation campaign - to limit its consumption growth to last year's 4.1 per cent level - is projected to help prop up the rupee, which has slid sharply against the US dollar this fiscal.

CAD widens to 4.9 per cent of GDP in Q1 on high gold, oil imports PTI

High imports of gold and oil pushed current account deficit (CAD) to 4.9 per cent of gross domestic product (GDP) to $21.8 billion in the April-June quarter of the current financial year.

CAD is the difference between inflow and outflow of foreign exchange.

The deficit had declined to 3.6 per cent in the January-March quarter after touching a record high of 6.5 per cent in the October-December quarter. It was 4.4 per cent (or $16.9 billion) in Q1 2012-13.

"The trade deficit, coupled with a slow recovery in net invisibles (income and services), led to widening of CAD to $21.8 billion in Q1 of 2013-14 from $16.9 billion in Q1 of 2012-13," the Reserve Bank of India (RBI) said in its Balance of Payments statement.

Gold imports increased by $7.3 billion in the first quarter of the current financial year. The imports stood at about 335 tonnes in the April-June quarter.

"Excluding the increase in gold imports of $7.3 billion in Q1 of 2013-14 over the corresponding quarter of the preceding year, CAD would work out to $14.5 billion, which translates into 3.2 per cent of GDP," the central bank said.

RBI said there was a small draw down on country's foreign exchange reserves to finance the CAD.

"On BoP basis, there was a slight draw down in foreign exchange reserves of $0.3 billion in Q1 of 2013-14 as against an accretion of $0.5 billion in Q1 of 2012-13," it said.

During the quarter, while exports declined by 1.5 per cent, imports recorded an increase of 4.7 per cent. The trade deficit widened further to $50.5 billion in Q1 of 2013-14, from $43.8 billion a year ago, RBI said.

The government plans to bring down CAD to 3.7 per cent, or $70 billion, in 2013-14 from 4.8 per cent, or $88.2 billion, in 2012-13.

FCNR golden goose: Great returns on borrowed capital

Foreign banks are scrambling to raise dollar deposits from non-resident Indians — even tempting them with loans — to open their foreign currency non-resident (bank), or FCNR (B), deposit accounts in India.

The move comes after the Reserve Bank of India (RBI), as part of its efforts to stem the rupee’s depreciation, opened a special window for swapping FCNR (B) dollar funds of three years or more at a concessional rate and offered various other incentives, including cheap dollar-rupee swap rates.

Observers say this has offered Indians residing abroad an opportunity to increase their income manifold using borrowed capital.

The process, as bankers and market participants explains, begins with a foreign bank requesting a non-resident to open a FCNR (B) deposit account with its India unit. The bank immediately offers the customer a loan against this deposit. The customer uses the loan to create another FCNR (B) deposit account, against which he is again given a loan. The process is repeated eight to 10 times. The customer benefits as he earns more interest on FCNR (B) deposits than he pays on loans against those.

Some of the Indian banks with foreign branches have also approached their non-resident customers to raise FCNR (B) deposits, but observers say these lenders are not as aggressive as their foreign rivals.

Industry analysts say, using this mechanism, non-resident Indians (NRIs) can make a net return that is significantly higher than the interest rates offered on deposits in developed markets like the US. The returns would easily lure NRIs. According to some estimates, by putting up just 10 per cent of the deposits, the client effectively makes between 18 and 21 per cent on the dollars.
On September 4, 2013, in an almost desperate move to arrest the slide the rupee, RBI had announced a window for swapping FCNR (B) dollar funds, mobilised for a period of at least three years, at a fixed rate of 3.5 per cent a year for the duration of the deposit. The scheme, the central bank had said, would remain operational until November 30, 2013.

In other words, the banking regulator is now permitting lenders to convert three-year FCNR (B) dollar deposits into rupees at 3.5 per cent, even though the swap cost, considering the recent rupee-dollar forward rates, is estimated to be more than six per cent. This has encouraged banks to mobilise FCNR (B) dollar deposits, as they can reduce their cost of fund by at least 250 basis points using this window.

“It is a win-win situation for all. The interest rates offered to non-residents on three-year FCNR (B) deposits in India are significantly more than the current dollar swap rate of 80 basis points a year for a comparable tenure. Banks will benefit, as they will have access to low-cost funds. And, ultimately, this will increase dollar flows into India,” Param Sarma, director and chief executive of NSP Treasury Risk Management Services, says.

Market participants expect banks to bring in over $10 billion through this route which will probably avoid the need for an immediate sovereign bond issue by the government.

“The swap window was necessitated by a sharp depreciation in the rupee and need to bridge the current account gap. There was a need for one large chunk of dollar inflow, which probably led to the introduction of this scheme. However, it is a subsidy, assuming the rupee-dollar swap cost is currently over six per cent. This subsidy will have to be borne by the country,” says Mecklai Financial Deputy CEO Partha Bhattacharyya.

Some industry analysts believe the subsidy burden on Indian taxpayers because of this move might be as high as Rs 2,000 crore a year, assuming banks bring in $10 billion of FCNR (B) deposits.

“We discontinued FCNR (A) deposits since we did not want to bear the entire currency risk, and these deposits also violated IMF (International Monetary Fund) conditions. But by allowing swap at a concessional rate of 3.5 per cent for FCNR (B), we are going back to the FCNR (A) regime, at least partly. I believe, we should be explicit in saying what would be the estimated cost of this subsidy, since the deposits might run up to five years,” Ranade adds.
The process, however, has raised concerns of systemic risk.

“The 2008-09 crisis was triggered by over-leveraging. We are again seeing foreign banks encouraging leveraging. There are reports that lenders are offering NRIs upfront loans against FCNR (B) deposits and repeating the process. Such leveraged money can leave as abruptly as it comes in, thereby increasing systemic risk,” Ajit Ranade, chief economist of Aditya Birla Group, says.

Rupee slide worrying but also good for the economy: PM

Prime Minister Manmohan Singh sought to soothe worries about the economy on Friday, telling parliament that the crashing value of the rupee was part of a needed adjustment that would make Asia's third-largest eco

The speech was the veteran economist's first substantial comment to parliament since the rupee suffered its steepest ever monthly fall in recent weeks, bringing back memories of a 1991 balance of payments crisis that made Singh famous.
Reading from a written statement, the prime minister promised his government would reduce the "unsustainably large" current account deficit undermining the currency.
"Clearly we need to reduce our appetite for gold, economise the use of petroleum products and take steps to increase our imports," he said.
But he said that a weaker currency was the natural outcome of several years of high inflation, and although the rupee had overshot in the foreign exchange market its decline would bring some economic benefits.
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Food Bill credit negative for India: Moody's

Giving a thumbs down to the Food Security Bill, rating agency Moody's said on Thursday the measure is credit negative as it will weaken government finances and deteriorate macroeconomic situation.

"The measure (Food Bill) is credit negative for the Indian government because it will raise government spending on food subsidies to about 1.2 per cent of gross domestic product per year from an estimated 0.8 per cent currently, exacerbating the government's weak finances," Moody's said in a statement.

Moody's currently assigns 'Baa3' rating on India, with a stable outlook. 'Baa3' means medium grade with moderate credit risk.

The Food Security Bill was passed by the Lok Sabha earlier this week.

The Bill seeks to provide cheap foodgrains to 82 crore (820 million) people in the country, ushering in the biggest programme in the world to fight hunger.

The annual financial burden after its implementation is estimated to be about Rs 1.30 lakh crore (Rs 1.3 trillion) at current cost.

As the Bill is likely to be implemented in the remaining months of the current fiscal, its impact on government finances will be less in 2013-14, but much more in the years to come, Moody's said.

The total food subsidy budgeted in the current fiscal is Rs 90,000 crore (Rs 900 billion), of which Rs 10,000 crore (Rs 100 billion) is towards the implementation of the programme.

"It will raise future subsidy expenditure commitments, hindering the government's ability to consolidate its finances," Moody's said, adding, the government subsidies will contribute to the already high food inflation.

The agency further said India's fiscal deficits are already higher than those of its emerging market peers.

It said the high fiscal deficit contributes to the Current Account Deficit by keeping domestic demand high and increasing imports.

A high CAD, the difference between inflow and outflow of foreign currency, puts pressure on the domestic currency and fuels prices.

The rupee has depreciated about 25 per cent this year and touched a record low of 68.80 to a dollar on Wednesday.

The Food Bill seeks to provide highly subsidised food grains to 75 per cent of the rural and 50 per cent of the urban population through the public distribution system. It will guarantee 5 kg of rice, wheat and coarse cereals per month per person at a fixed price of Rs 3, Rs 2 and Rs 1 respectively.