India has succeeded in taming its current-account deficit, the only one to do so among the five emerging economies identified by Morgan Stanley as particularly vulnerable to the withdrawal of America’s monetary stimulus. India’s current-account deficit in the fourth quarter of 2013 was a much improved minus-0.9% of GDP, from minus-6.5% a year ago.
The improvement underscores the country’s “strengthening external balances,” said BBVA Research Emerging Markets in a report. The unit of Spanish bank BBVA noted that, at minus-2.6% of GDP, India’s 2013 deficit is the smallest in three years.
India’s current account deficit has improved significantly over the past year
“Over the past year, India has been the only ‘fragile five’ economy – Brazil, Indonesia, South Africa, India and Turkey – to reduce its current account deficit to sustainable levels,” said BBVA Research. “While India’s CAD fell by more than 200 basis points, others have seen a deterioration in their external balances.”
India has outperformed its ‘fragile five’ peers in successfully reducing its external imbalances
BBVA credited India’s feat to “concerted policy actions to curb non-essential imports such as gold through custom duty hikes and tighter lending norms, alongside weak domestic demand and a pick-up in exports.”
However, it maintained its “near-term cautious stance” on the rupee, which has appreciated 8% to 61.29 to the dollar since September. BBVA forecasts that the currency will fall to 63 to the dollar by the end of March.
A smooth tapering of America’s quantitative easing measures is “critical,” said BBVA, although this is an external event that India cannot do anything about.
The outcome of the coming elections is also a concern. "We would be wary on an unclear national elections verdict, which starts April 7," said BBVA. But while "a fractured mandate may raise fiscal deficit concerns for India and thereby dampen investor confidence, a strong verdict for a pro-reform government would boost sentiment and the currency.”
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