Tuesday, June 18, 2013

Trade deficit

Our trade deficit for the period April 2012 – May 2013 has catapulted to a 7 month high of 20 billion USD. It is no secret that import of gold has been the major dampener.  Exports de grew by 1.1% despite depreciation of rupee. Widening trade deficit, weak IIP data, high retail inflation coupled with weak currency are making things complicated. Retail inflation as I see will remain a persistent problem due to government’s increase in MSP for farm products ahead of elections.
Given the heightened global uncertainty, the bigger concern for the central bank will be to fund the CAD. One of the options that are being widely speculated is to float dollar bonds similar to Resurgent India Bond 98 & India millennium deposits 2000. In the past, SBI had lent its balance sheet and this time they have almost said a categorical NO. Given the restriction for Banks in terms of CRR/SLR, government might consider taking up on its own as it would considerably reduce the cost of borrowing

Market is keenly awaiting the outcome of US Fed meeting on bond purchases by Wednesday. There’s a belief about a rate cut if US Fed were to pause further liquidity infusion. I beg to differ as we entirely stare at a different set of challenges.  Strictly speaking, the currency of a county should reflect its economic fundamentals. If one were to apply this principle, USD should have ideally weakened. The primary reason for its strength is most of the global trade happens in USD.

Last week, I happened to read some articles recommending US equity funds.  US was one of the countries that was badly hurt post 2008 – 09 economic crisis. US Fed has been pumping trillions of dollars through buy back of bonds which has largely helped the banks to re capitalize their balance sheet. However, this has not translated to a real growth in their economy. On the contrary, lot of these funds have moved to emerging economies like India for better returns. Investing in India is any day a prudent decision.
Ramanathan Dwarakanathan

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