India troubled by widening twin deficits

The country's fiscal and current account deficits are at all time highs and are causing all sorts of economic hiccups.

From persistently high interest rates to slowing growth, the consequences of runaway deficits are hitting India hard. An easing is expected in 2013 at about 120 bps, according to Morgan Stanley estimates, which will help bring back confidence to the market.

Here's more from Morgan Stanley:

F2012 ended with the twin deficits at all time high levels exceeding the F1991 level, when India suffered a BoP crisis, by 60 bps. Falling foreign exchange reserves have compounded the problem, which means that India is also suffering from BoP stress. This is aptly reflected in the currency and domestic liquidity causing interest rates to stay high and growth to slow creating a vicious macro cycle. Not surprisingly, the market has responded - the Nifty fell 9% in F2012 whereas the small- and mid-cap indices fell 19% and 8%, respectively.

The macro mix exposes India to global events more than it may choose to. It seems all grim. Here is the silver lining - the market is hinged to the change in deficits rather than the level of the deficit. Chetan Ahya, our economist, even with his sub-consensus GDP growth forecasts is estimating the combined deficits to decline 120 bps in F2013 after its steep 280 bps rise in F2012. On its own, this should signal an improvement in market performance, if history serves as a guide.