Analysis of India's Balance of Payments
India's balance of payments in transition
C. P. Chandrasekhar
Jayati Ghosh
Recent weeks have seen a weakening of the rupee, even as the BSE Sensex shows signs of buoyancy. Underlying this trend are developments on the balance of payments front which point to a transition that could lead to an increase in external vulnerability, argue C. P. Chandrasekhar and Jayati Ghosh.
WITH the rupee touching a 10-month low early this October and settling at well above the 44-to-the dollar mark, observers have begun to express concern over the strength of the currency.
The Reserve Bank of India Governor has, however, declared that such movements are "not unusual". On the surface, there could be two reasons for the rupee weakening. One, a growing demand for the dollar, driven by expectations of an appreciation of that currency. And the other could be a delayed response of the central bank, which could stabilise the rupee through sales of some of its dollar holdings.
Those holdings rose by more than $24 billion over the last 16 months, as a result of large net purchases by the RBI, especially during February and March 2005 (Chart 1). Offloading some of these reserves, exceeding $140 billion in total, can help the RBI raise the value of the rupee if it so desires.
But these grounds for complacency should not result in neglect of certain new trends in India's balance of payments, which point to an incipient transition in the direction of increased vulnerability.
The first sign of such a possible transition is the emergence of a deficit on the current account of India's balance of payments in recent times.
As Chart 2 shows, after three consecutive years of a current account surplus, which exceeded $10.5 billion in 2003-04, the country experienced a return to a current account deficit amounting to $6.3 billion in 2004-05. That this was not a short-term tendency is reflected in the balance of payments figures for the first three months of this
C. P. Chandrasekhar
Jayati Ghosh
Recent weeks have seen a weakening of the rupee, even as the BSE Sensex shows signs of buoyancy. Underlying this trend are developments on the balance of payments front which point to a transition that could lead to an increase in external vulnerability, argue C. P. Chandrasekhar and Jayati Ghosh.
WITH the rupee touching a 10-month low early this October and settling at well above the 44-to-the dollar mark, observers have begun to express concern over the strength of the currency.
The Reserve Bank of India Governor has, however, declared that such movements are "not unusual". On the surface, there could be two reasons for the rupee weakening. One, a growing demand for the dollar, driven by expectations of an appreciation of that currency. And the other could be a delayed response of the central bank, which could stabilise the rupee through sales of some of its dollar holdings.
Those holdings rose by more than $24 billion over the last 16 months, as a result of large net purchases by the RBI, especially during February and March 2005 (Chart 1). Offloading some of these reserves, exceeding $140 billion in total, can help the RBI raise the value of the rupee if it so desires.
But these grounds for complacency should not result in neglect of certain new trends in India's balance of payments, which point to an incipient transition in the direction of increased vulnerability.
The first sign of such a possible transition is the emergence of a deficit on the current account of India's balance of payments in recent times.
As Chart 2 shows, after three consecutive years of a current account surplus, which exceeded $10.5 billion in 2003-04, the country experienced a return to a current account deficit amounting to $6.3 billion in 2004-05. That this was not a short-term tendency is reflected in the balance of payments figures for the first three months of this