CAD to ease to 4.4% in FY14 on lower oil, gold prices: BofA-ML

Jun 28 2013, 15:54 IST
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India's CAD at 4.8% of GDP in FY13 was better than the market expectation of 5 per cent of GDP. (Reuters) India's CAD at 4.8% of GDP in FY13 was better than the market expectation of 5 per cent of GDP. (Reuters)
SummaryIndia's CAD at 4.8% of GDP in FY13 was better than the market expectation of 5 per cent of GDP.

India's current account deficit (CAD) is likely to ease to 4.4 per cent of the GDP in the current fiscal year on lower oil and gold prices, Bank of America Merrill Lynch (BofA-ML)said in a research note.

The country's CAD at 4.8 per cent of GDP in FY13 (and USD 18.1 billion in the March quarter) was better than the market expectation of 5 per cent of GDP.

"It (CAD) should come off to 4.4 per cent of GDP in FY14 on lower oil and gold prices, although the June quarter current account deficit, at USD 28 billion, will be seasonally higher," the note added.

CAD, which is the difference between the outflow and inflow of foreign currency, however, moderated "sharply" to 3.6 per cent of GDP in the last quarter of 2012-13 fiscal after it touched a historic high of 6.7 per cent in the October-December quarter.

It was 4.4 per cent in the March quarter of 2011-12.

With March quarter CAD coming at 3.6 per cent against expectations of 4.4 per cent, the rupee rebounded by 53 paise, its best single-day gain in a fortnight, to end at 60.19 against dollar yesterday.

The rally in the rupee continued today also as it rose by 37 paise to Rs 59.82 against the American currency in early trade.

According to BofA-ML "the INR will not stabilise until the RBI is able to recoup FX reserves and reassure investor confidence."

The note further noted that "INR expectations can rapidly shift towards Rs 62-63/USD if the RBI loses the on-going battle for Rs60/USD contrary to our expectations."

The global brokerage firm however expects RBI to defend the Rs 60 to a dollar level and the central bank "sooner or later, will need to augment FX reserves by say, issuing NRI bonds".

In order to arrest rupee depreciation, Reserve Bank has a capacity to sell up to USD 30 billion from the forex reserves and may go for a NRI bond issue to mop-up up to USD 20 billion, BofA-ML said.

Every round of volatility in the rupee (the current one has been on for over three weeks now) causes a dent of up to USD 15 billion to the forex reserves, and considering where the reserves stand right now, RBI can sell up to USD 30 billion, the report said.

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