Capital flows to keep CAD on leash

Finance minister P Chidambaram could get some help from the US fiscal cliff deal in getting the current account deficit under control. On Wednesday, he stressed on the importance of attracting capital flows into the country to fund the CAD.

The twin of the fiscal deficit, the CAD too is proving tough for the government to control. It touched 5.4 per cent in the second quarter of the fiscal and may cross 4.2 per cent in 2012-13.

Other than gold and oil the reasons why the CAD is high is that international financial flow was nervous so far. It was concentrated in safe haven stuff like US dollars and gold. So even for emerging markets like India Sebi's latest data shows FII inflows into debt was at a six year high of Rs 45,400 crore in 2012.

Equity markets were just not the flavour of the year. RBI's latest data on India's International Investment Position reveal that foreign direct and portfolio investments have risen only marginally in the second quarter of the fiscal by $ 24.4 billion and $ 17.1 billion, respectively. On an annual basis the trends are even more dismal direct investments grew by $13.1 billion by September 2012, over a year ago, portfolio investments increased by just $ 9.5 billion.

With the spending cuts and the likelihood of another US recession averted for now, more capital flows should be expected to come into emerging economies and India's equity markets could prove an attractive option. Markets have responded well to the deal in Washington to delay the fiscal cliff. The Bombay Stock Exchange Sensex and the Nifty have touched a two-year high over the past two trading sessions and the bull run is expected to continue. While the finance ministry and the RBI have time and again spoken about the need to deepen the bond market, the Union Budget next month should be used for some definite announcements on this front. Some of those could be measures to attract even more capital flows.

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