Also Read: Q3 Balance of Payments: Key takeaways
Keki Mistry, vice-chairman and CEO, HDFC added that the actual current account deficit is higher than expected. "The current account deficit is caused by low exports and sluggish manufacturing due to high interest rates. I expect market's reaction to the deficit to be of no significance ."
Below is the edited transcript of the discussion on CNBC-TV18
Q: How can the government tackle the current account deficit in the short-term?
Sanyal: There is no quick fix to address the current account deficit. The government must ensure capital flows remain strong. Though NRI bonds could be used, the government does not favour of that medium. Some favourable tinkering of the withholding tax could provide further impetus to FII investment into debt.
At the moment India imports close to USD 60 billion of gold a year. So, if the government is able to introduce harsh measures to curtail gold imports, it could considerably reduce the current account deficit.
Q: Why has the current account deficit (CAD) now seem to be a run away problem with fewer options available with the government to control it?
Mistry: For a long time, the current account deficit has been one of India's biggest economic problems. The centre of the problem are various structural glitches. Exports are always going to be a problematic due to increased dependence on the West. The manufacturing sector is plagued by higher interest rates and operating costs that adversely impact the level of competitiveness.
Q: How will the Reserve Bank of India (RBI) react to the deficit at this level?
Mistry: It will impact the RBI's decision on cutting rates. My estimate of a 100 bps reduction in rates during the year- 0.25 percent in January, 0.25 percent in March, then a little bit of a halt to wait and see how the monsoons are and then another 50 basis points in the second half of the year, still stands.
Q: Do share the government's optimism that the CAD in Q4 will be lower?
Sanyal: I tend to concur with the government's view that the deficit at this particular level is clearly the peak and going forward, the deficit could be somewhat lower. But this will not be due to higher exports but due to a fall in gold consumption. Indian gold imports follow the trend in international gold prices.
Global gold prices have been tapering off in dollar and rupee terms. If that trend remains, a bit of relief can be expected . Next in magnitude of impact are oil prices. If oil demand remains pretty inelastic, some relief can come be expected in the subsequent quarters.
Q: How do you expect the rupee and market to react?
Sanyal: I would expect the impact on those two variables should be relatively limited.
Q: Do you believe that the street has factored this in and the rupee will not significantly react?
Mistry: I don't see the markets reacting violently. The government has to continue with the series of reforms that will continue to invite foreign funds and hope that global liquidity remains strong. The rupee might drop temporarily by 20-25 paisa on Monday morning.
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