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Economy Jan 2, 2013

High CAD may increase volatility in forex mkt, say experts

With the current account deficit (CAD) touching a record high of 5.4 percent of the GDP in the September quarter, economists believe the same could result in higher volatility in forex market.

"Though second quarter CAD number was as per expectations, widening deficit increases the vulnerability of the domestic economy to the capital flows," Chief Economist of the rating agency, Crisil, D K Joshi said, adding that for the current fiscal, "We hope the CAD to be around four percent".

The domestic currency would be a lot more volatile due to higher dependence on capital flows. Reuters

He said though financing the deficit did not seem to be an issue at this point of time due to higher capital inflows, the domestic currency would be a lot more volatile due to higher dependence on capital flows.

Current account deficit, which is measured by the difference between a country's exports of goods, services and transfers and total imports within a time period, touched a record high of 5.4 percent in the second quarter (July- September) or at $22.3 billion amid falling exports, as per the data released on Monday.

The Chief economist of the State Bank of India (SBI) Brinda Jahagirdar, however, was hopeful about CAD numbers improving in the fourth quarter of current financial year. "Third quarter numbers are also likely to be weak. Things are expected to improve in the Q4," she said.

She also said though financing of CAD is not likely to be an issue due to higher capital inflows in the recent months, the rising trend of using short-term debt for financing the deficit is a matter of concern.

Another economist from Bank of Baroda also said that contraction of exports despite a falling rupee is a cause of worry. "Exports contraction in recent months despite a falling rupee is a cause of worry. Also, the factors contributing to higher CAD like gold and others, are not showing any change. So, higher deficit figure poses a risk to the economy," Chief Economist of Bank of Baroda, Rupa Rege Nitsure said.

She said volatility in rupee is likely to continue and it is likely to trade in the range of 54 to 56 levels per dollar in the near future.

Reuters

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