International | Jun 16 2006
By Greg Peel
When everyone talks of China, constantly, India is always mentioned in the next breath. The world’s two most populous nations are vying for world attention. China has the jump on India, but China is also very much in focus as having a huge current account surplus that goes a long way to being the flipside of the US current account deficit. Unlike China, India runs a current account deficit.
India’s current account went into deficit in FY05. In the last month or so, emerging markets have been dumped as risk tolerance has evaporated and risk premiums have begun to blow out. Since May 10, the Indian stock market has been sold down by 25%. Citigroup calculates this equates to US$1.6bn leaving the country. This has raised a lot of concerns over India’s external account.
Citigroup believes that if sentiment remains weak, reserves could decline by US$4bn, but a worst-case scenario would be US$14bn. The Reserve Bank of India has sufficient foreign exchange reserves to counter, says Citigroup, but any drawdown will impact interest rates and currency.
There is good news, however. Citigroup notes that apart from oil, the Indian deficit is widening due to non-oil imports of which 70% is comprised of capital goods and industrial inputs. Therefore a widening of the current account deficit is justified given that "India has shifted to a higher growth trajectory".
There is turbulence in the market and India could yet end up with a higher interest rate. However, Citigroup suggests noting the "more powerful factors at play", being favourable demographics, rising incomes and outsourcing, that will help sustain growth momentum.
Furthermore, as Indian consumers and corporates are still relatively underleveraged, Citigroup believes rate rises of 50-100 basis points would not derail growth. The broker maintains a 7.6% GDP growth forecast for FY07.
Thus the Indian story is still real.
