Friday Podcast 11th October 2013
Transcript of Podcast
The Government and the RBI may be patting themselves on their back on the sharp fall in gold and silver imports that have brought down trade deficit, which in turn is expected to bring down the current account deficit. A lower current account deficit is positive for the Indian Rupee (INR) that saw record lows in August 2013.
The government raised duties on gold and silver imports and RBI placed restrictions on financing the imports and these twin moves brought down imports sharply. However such restrictions on commodities (even if deemed non essential) are forms of control on free flow of goods and services across borders. The normal functioning of markets gets disrupted, there is an artificial scarcity of restricted commodities and this creates pent up demand going forward.
India by imposing restrictions on gold and silver imports is actually starting to make the Indian Rupee a managed float on the current account. In short the INR is not being allowed to trade at its fair value that is determined by demand and supply for the currency. The government and the RBI know this but their concern on the weak INR overrode practical economics. The question is when will the restrictions on gold and silver imports be taken off? What will happen when the CAD shoots up on pent up demand for the commodities?
Well, tomorrow is another day and we’ll take it as it comes, is the policy of the government and RBI. Hopefully, tomorrow will not come at the wrong time.
The September 2013 trade deficit numbers that came in at a thirty month low at USD 6.72 billion has raised expectations of a sharp fall in the July-September CAD (Current Account Deficit) numbers. The CAD for April – June 2013 stood at USD 21.8 billion or 4.9% of GDP. Trade deficit for April-June 2013 was USD 50.14 billion.
The July-September 2013 trade deficit is 40% lower than that of the previous quarter at levels of USD 29.9 billion. The sharp fall in trade deficit quarter on quarter is largely due to the sharp fall in gold and silver imports. Gold and silver imports have come off from levels of USD 18.35 billion in the April-June 2013 quarter to levels of USD 4.35 billion in the July-September 2013 quarter.
The sharp fall in gold and silver imports that contributed to around 34% of CAD in the April-June quarter will bring down CAD in the July-September quarter by at least 40%. Markets are cheering the expected fall in CAD and are factoring in higher levels for the Indian Rupee going forward. The INR has appreciated by 10% from lows against the USD over the last 45 days.
RBI is also loosening its tight money policy on the back of better trade deficit and CAD numbers. RBI has cut the MSF rate by 125bps since the 20th of September 2013.
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Thank you for listening in. Have a good weekend.