Despite higher current account deficit, economists expect the rupee to appreciate in next 12 months ?Although the negative BBoP is putting pressure on the rupee , we believe the recent sell-off, largely due to US dollar strength, is overdone. We continue to maintain our three, six and 12-month USD/INR targets of 43.9, 44.1, and 42.2,?? said Tushar Poddar, vice president , Asia Economics Research at Goldman Sachs.
The 1Q data is in line with our expectations of the current account deficit widening to 3.5% of GDP this year from 1.5% of GDP in FY08. ?With a high deficit and negative net FII inflows, we expect the BBoP to remain negative in FY09. In the short run, the rupee may continue to suffer from the high deficit, global risk aversion and deleveraging.
With oil prices coming off substantially, one of the biggest threats to the current account has been alleviated.
Further, we expect inflation to peak in November and then start coming off significantly, which will allay another key concern for investors,?? he explained. Whilst these numbers would be comfortably the highest on record, they are still likely to be consistent with manageable current account a deficit, which is perceived to be in the range of 2.5% to 3% of GDP, he said.
?Impending weakening in the major export destinations does not bode well for Indian exports. Despite the current softening in the domestic currency our modeling work suggest that exports growth is lot more responsive to growth in major export destinations than any softening in the domestic currency,? said an HSBC report.
On Tuesday, the Reserve Bank of India (RBI) said that major sources of accretion to foreign exchange reserves during the first quarter of 2008-09 have been foreign direct investment, banking capital, short-term credit and ECBs. The accretion to the foreign exchange reserves was $2.2 bln on a BOP basis, excluding valuation effects, during the first quarter of 2008-09, the RBI said.
Valuation gain, reflecting the appreciation of major currencies against the US dollar, accounted for $0.2 billion in total reserves during the first quarter this fiscal as against a valuation gain of $3 billion during the corresponding period of previous year. The foreign exchange reserves have increased by an amount of $2.4 billion during first quarter of 2008-09 including the valuation effects as compared with an increase of $14.2 billion during 2007-08. The central bank said that net ECB inflows, which is disbursements or inflows minus repayments or outflows to India amounted to $1.3 billion in the first quarter of 2008-09 as compared to $6.9 billion in 2007-08. Net ECB inflows were lower at 11.8% of net capital flows during first quarter of 2008-09 as against 40.3% of net capital flows in 2007-08.
Banking capital primarily represents foreign assets and foreign liabilities of commercial banks (ADs). Among the components of banking capital, NRI deposits witnessed a net inflow of $813 mln in first quarter of 2008-09, a turnaround from net outflow of $447 mln in first quarter of 2007-08.
Banking capital, excluding NRI deposits, registered higher net inflows at $1.9 bn during Q1 2008-09 as against net outflows of $0.5 bln in first quarter of 2007-08. The net inflows under commercial banks assets in first quarter of 2008-09 primarily reflected the drawdown of assets held abroad by the Indian banks while the net inflows under commercial banks liabilities was mainly due to the overseas borrowings of the banks, said the RBI.
