Concerns on Unfunded CAD are overdone

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SummaryQ2 will be the most painful quarter we have seen in this downturn

FY14 is recorded at 10% y-o-y i.e. a $30bn increment in exports receipts, and (ii) full year imports growth is recorded at 3% y-o-y with the slower imports growth being driven by lower imports of gold, the incremental imports bill for FY14 amounts to an increment of $15bn. This should then mean that India’s CAD for FY14 gets compressed to $75bn (i.e. 90+15-30 $bn). From thereon, a combination of import restrictions on electronic goods, iron & steel and defence goods is likely to compress the CAD by another $15 bn thereby leading the CAD to be recorded at $60 bn.

As regards the funding side, assuming that FDI inflows in FY14 are recorded at $10bn (v/s the five year average of $18bn), banking capital flows are recorded at $5bn (v/s the five year average of $7bn), loans based net inflows are recorded at $10bn (v/s the five-year average of $20bn), then the funding gap amounts to $35 bn (i.e. 60-10-5-10). This gap is likely to be funded using a combination of FX reserves, quasi-sovereign bond issuancebond issuance and the swap line that has been set up with the Bank of Japan. Whilst this is not an ideal situation to be in, this situation does not amount to an FX crisis.

The author is CEO, Institutional Equities, Ambit Capital

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