Analysts see FY'15 CAD rising to 2.1-2.6% on growing imports

Written by PTI | Mumbai | Updated: May 28 2014, 00:35am hrs
GoldAccording to RBI data, FY14 saw CAD narrowing to 1.7 per cent of GDP from 4.7 per cent. Reuters
Current account deficit, which narrowed to 1.7 per cent of GDP in FY14, is likely to rise to 2.1-2.5 per cent this fiscal on higher imports of gold and other items as the economy improves, say analysts.

While Wall Street brokerage Goldman Sachs has pegged CAD at 2.6 per cent this fiscal, which is the highest forecast amongst a clutch of analysts, domestic rating agency India Ratings projects it at 2.1-2.2 per cent.

Bucking the overall trend, domestic brokerage Kotak Equities said expects the CAD to improve to 1.4 per cent of GDP at USD 28.3 billion and with likely healthy capital flows and better rupee level which it sees in the range of 57-61.

According to RBI data, FY14 saw CAD narrowing to 1.7 per cent of GDP from 4.7 per cent (USD 87.8 billion in FY13), while in the March quarter it shrunk massively to 0.2 per cent of GDP, which is a lowest since March 2009.

The RBI data showed that a massive contraction in the trade deficit, coupled with a rise in net invisibles receipts, resulted in a reduction of CAD to USD32.4 billion from USD 87.8 billion (4.7 per cent of GDP) in 2012-13.

India Ratings said the remarkable turnaround in CAD is much better than the agency's forecast of USD 38.8 billion of (2.1 per cent of GDP) as the gains from curbs on gold imports was much higher and stood at USD 33.4 billion from USD 55.8 billion in FY13.

"However, we expect CAD to expand to USD 45.4 billion (2.1 per cent of GDP) in FY15 on the back of a mild industrial recovery," India Ratings said, adding its expects exports growth to increase in the near term in view of the WTO projection of 4.7 per cent growth in world trade in 2014.

It also expects a modest pick up in imports in FY15, as its sees stable crude prices, lower gold imports and limited upside in GDP growth.

"As per our initial estimate, in this fiscal CAD is likely to be in the range of 2.1-2.2 per cent. Even relaxation in gold imports could widen of CAD but prospects of exports going up with global recovery is also there," Axis Bank chief economist Saugata Bhattacharya told PTI.

In a report, Goldman said the CAD numbers were in line with its expectations. But said, "It expects the CAD to rise gradually to 2.6 per cent of GDP in FY15 due to a gradual increase in imports on better domestic demand, as well as some relaxation in gold import restrictions by the new government."

On the rupee, it expects some appreciation pressure on in the near term from greater portfolio flows. "However, we do not expect the rupee to appreciate significantly further due to the RBI's preference of building up reserves and preventing significant appreciation, the gradual worsening in the current account balance, and significant inflation differential with partner countries."

Deutsche Bank in a report said CAD is no more a major concern for the economy. "In FY15, we expect CAD to rise to about USD 50 billion (2.3-2.5 percent of GDP), on higher imports (about 10 percent growth) and stable exports (7-8 per cent).

As restrictions on gold imports get relaxed to some extent and as domestic demand starts picking up from the 2H of FY15, we expect imports growth to rise and stabilise, which ought to push the current account deficit higher.

"But we are not particularly worried about this expected increase in CAD, as we would view this as a sign of stabilisation of domestic demand, rather than signals of any imbalances being created. We also would not worry too much about financing of CAD, as we remain optimistic about capital flows outlook, especially post the decisive election outcome," Deutsche report said.

Domestic ratings agency Crisil pegged CAD to widen to 2.2 per cent of GDP or USD 47 billion in the current fiscal, as restrictions on gold imports are gradually withdrawn and imports of capital and consumption goods pick-up with economic recovery.

British brokerage Barclays describing the fall in CAD to a five-year low at 0.2 per cent of GDP in the March quarter, said this is the smallest deficit since March 2009.

"The decline in the deficit continues to be driven by lower gold imports and softer non-oil, non-gold demand, which helped contain the merchandise trade deficit. Given that the government's measures to restrict gold imports largely remain in place, we do not think the current account will widen significantly in 1H FY15. This poses a risk that CAD will be smaller than our forecast of USD billion (2.4 per cent of GDP) for FY15.

Another domestic rating agency Icra described the sharply lower CAD print is largely in line with expectations, but warned that the elevated inflation and rupee strengthening are likely to erode the competitiveness of exports which will widen trade balance and push up CAD this fiscal to USD 40-45


"A revival in domestic consumption or investment would boost growth of non-oil, non-gold imports in H2 of FY15. Even if the 20:80 scheme for gold imports is continued, we expect CAD to widen to USD 40-45 billion in FY15. But lifting of curbs on gold imports may widen CAD by an additional USD 10-15 billion," it said.