India's trade deficit narrowing to a 30-month low in September augurs well for its high current account deficit (CAD) and would also ensure rupee stability, rating agencies said on Wednesday.
"CAD will fall sharply in Q2 and may be around 1 per cent of GDP," India Ratings said in a note this evening after the release of the trade data earlier in the day.
Lower current account deficit along with regulatory actions will help the rupee stabilise at the 59-61 levels against dollar by the end of the current fiscal year, even though there may be some fluctuations in the intervening period, it said.
Without giving an expected number, its peer Crisil said, "An over $20 billion reduction in merchandise trade deficit in Q2 compared to Q1 suggests significant improvement in CAD for the second quarter."
Crisil said if exports continue to remain strong, as has been the case in the second quarter, it will revise downwards its FY14 current account deficit estimate of 3.9 per cent of GDP but did not offer a number.
An 11.15 per cent rise in exports and 18.1 per cent decline in imports helped narrow the trade deficit to a 30- month low of $6.76 billion in September. This was the third straight quarter of growth in exports.
Export growth was aided by a low base, weak rupee and rising global demand, Crisil said. It further said in-bound shipments were restricted due to a fall in oil and gold imports. The agency also said gold imports during the second quarter were 300 tonnes lower than the one observed in the same period last year due to a series of curbs imposed by the government.
Current account deficit, the difference between inflow and outflow of foreign exchange, had stood at an alarming 4.9 per cent of GDP in Q1.
This was one of the prime reasons for the heavy fall in the value of rupee, which has since recovered.
Finance Minister P Chidambaram and Reserve Bank Governor Raghuram Rajan have been exuding confidence that current account deficit will come in under $70 billion, or around 3.8 per cent of GDP, for the ongoing fiscal year (FY14) and that the government will not have much trouble financing it.
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