Analysts have pegged the full-year current account deficit target at under 2 per cent of India's GDP following a massive improvement in the third quarter, when it dropped to an eight-year low of 0.9 per cent, but warned CAD will be close to 3 per cent the next fiscal.
While the Q1 CAD, the difference between outflow and inflow of foreign exchange, stood at a high of 4.9 per cent, it improved to 1.2 per cent in Q2 and to 0.9 per cent, or USD 4.1 billion, in Q3 of the current fiscal from 6.5 per cent a year ago. In FY13, the gap was at a record high of 4.8 per cent, or USD 88 billion.
The improvement was largely owing to curbs on gold imports, stronger exports and weak domestic demand. As a result the net capital account swung into a surplus of USD 23.8 billion in Q3 from a deficit of USD 5.4 billion in Q2 on one-off accretion under the forex swap window.
"We expect the CAD to be at 1.9 per cent of GDP in FY14, but may widen to 2.5-3 per cent in FY15," Sonal Verma of Japanese brokerage Nomura said in a note.
She attributed the improvement to a higher invisibles surplus, as outflows on investment income (on equity and investment fund shares) moderated. In addition, even as export growth moderated (7.5 per cent in Q3 from 11.9 per cent in Q2), imports fell more sharply (-14.8 per cent against -4.8 per cent), keeping the trade deficit contained.
On the net capital account swinging into a surplus of USD 23.8 billion in Q3 from a deficit of USD 4.8 billion in Q2, she said this was due to a one-off accretion under forex swap window wherein USD 21.4 billion came in as NRI deposits.
Excluding this, capital inflows were only marginally positive as higher inflows under FDI, portfolio inflows and external commercial borrowings were offset by outflows on short-term trade credit, other capital and repayment of overseas borrowing and a build-up of overseas foreign currency assets by the banking system, Verma said.
In a note, DBS Bank said the bulk of CAD improvement came from near 40 per cent fall in merchandise trade deficit, which was a combination of modest pick-up in exports (up 7.5 per cent) along with a sharp drop in imports (-14.8 per cent) much due to lower gold purchases