India's trade deficit swelled in July to its biggest level in almost two years, putting further pressure on the current account and on the need for India to attract capital inflows to avoid pressure on its currency.   

The trade deficit in July widened to its biggest level in 22 months and a purchasing managers' index showed a slowdown in the pace of export orders received by India's manufacturers in August, suggesting more pressure on the trade account.   

For now, the government's economic advisory panel expects capital inflows to be more that sufficient to offset the growing current account deficit, which reached its highest in almost three decades in the January-March quarter.
   
The government expects the current account deficit to reach $41.8 billion, or 2.7 percent of projected GDP, in the fiscal year to next March. It doesn't see problems unless the current account exceeds 3 percent of GDP.   

But some analysts say the deficits are starting to have an influence on the rupee, which is only one of two Asian currencies monitored daily by Reuters that have fallen against the dollar this year.

Shubhada Rao, chief economist at Yes Bank in Mumbai, suggests the central bank's campaign to raise interest rates will help offset some of the current account pressures.

"I think RBI raising rates may serve well as higher rate differential can attract more capital inflows and rate tightening may moderate domestic growth and therefore temper imports," Rao said.   

July exports rose 13.2 percent from a year earlier, slowing down sharply from 30 percent recorded for June. Imports for the same month rose 34.3 percent from a year earlier, widening the trade deficit to $12.93 billion, the biggest since September 2008.   

The April-July trade gap rose about 39 percent from a year earlier to $43.6 billion. The government said last month that the shortfall would swell to $120 billion this fiscal year.

The growing trade deficit is the main factor pushing out the current account deficit, which widened to $13 billion in the March-quarter, the biggest since 1981.

Although the current account deficit is growing quickly, there are few concerns among policymakers or economists that it will translate into a deterioration in the balance of payments.   

The Prime Minister's Economic Advisory Panel expects capital inflows of $73 billion in 2010/11, which will more than cover the expected current account shortfall of $41.8 billion. 

"There is no panic in terms of bridging the current account deficit," Rao said. "There is a concern, but no panic."     That sentiment was also echoed by the Reserve Bank of India, a central bank source said.

"We don't foresee a scenario where capital flows will not be able to finance current account deficit this year. Currently, our forex reserves are rising," the source said.

India's economy grew 8.8 percent in the March-June quarter over a year earlier, its strongest pace in nearly three years.
 But analysts expect a slowdown in coming quarters to leave full fiscal-year growth at 8.5 percent. - Reuters