India Rupee Growth Boosts Confidence amid Trade Deficit Worries

The Indian currency with its new symbol is riding high as since May 2009 investors pumped in unprecedented $24bn into the nation's stocks and bonds. In contrast, the BOP statistics draw a gloomy picture with rising trade deficit put at $56.6bn in the April to August stretch.

In a data compiled by Bloomberg shows - one-month options conferring the right to sell the rupee against the USD cost 30 basis points more than contracts to buy as of yesterday, down from 600 on May 25 and below the level for both Brazil's real and Russia's ruble. The rupee rose 3 percent this month, more than any currency in Asia except the South Korean won.

Toboc analysts indicate the rupee's growth should be predominately attributed to foreign investors finding India as a safe parking space for their funds as most countries linked to sluggish growth after rebound from meltdown yielded reduced returns. The influx of global funds into the Indian equities is to the tune of $15bn, up 57 percent as compared to the same period of previous year, and about $9bn into debt, more than the combined amount in the previous eight years.

According to the median forecast in a Bloomberg survey of 12 analysts, India's currency, which rose 0.3 percent to 45.705 per USD yesterday, will climb 5.5 percent to 43.250 by the end of 2011. Asia's third-biggest economy grew 8.8 percent last quarter from a year earlier, the most since 2007 and the fastest pace among major economies after China and Brazil.

Rajeev Malik, a senior economist at CLSA Asia Pacific Markets points out "Gains in the rupee may be limited as concern grows that India's current-account deficit may widen." However, another school of thought feels the import-laden trade deficit of India is actually reflecting a stronger domestic manufacturing sector, with India's 13.8 percent industrial growth rate as of July driving up demand for overseas-made machines and other capital goods.

In August, imports from India increased 32.3 percent from a year earlier to $29.7bn to a record overall at $141.9bn while exports were down by 22.5 percent to $16.64bn during the same period after hitting 30 percent growth in the three months through June. Ajay Sahai, director general and chief executive of the Federation of Indian Export Organisations (FIEO), an industry body informed a large portion of the imports were of capital goods, chiefly absorbed by rapidly growing power sector, therefore, trade deficit was of no concern as these imports would ensure industrial growth.

By Jose Roy