Nomura sees current account deficit 4.2%

The trade deficit worsened by an average of USD 3.8 billion between September and October during the last three years. However, the trend in imports ex-gold is also clearly higher, they warned.

Explaining the rising upside risks to higher CAD, they said the problem is that the rise in non-oil imports is not consistent with a slowing economy, as the IIP data suggest.

Also, the higher trade deficit reflects weak exports, driven by a seasonal rise in gold demand and also a genuine improvement in imports due to import substitution.

"The ongoing rebound in import suggests that supply-side constraints and the high cost of domestic production may be leading to greater import substitution, dragging on domestic industrial production and worsening the trade deficit, The rise in imports is not consistent with a slowing economy," they said.

The government and the Reserve Bank as also economists are of the view that the country can sustain a 3 per cent CAD comfortably with the current level of capital inflows.

Nomura, however, downplayed latest contraction in IIP saying the negative industrial output data may be exaggerating the growth slowdown, as power outages have also constrained production.

"Overall, the data suggest that the economy is facing severe supply-side constraints, making it imperative to ease bottlenecks. Until then, we expect recovery to remain shallow as the economy will be quick to hit a ceiling," Nomura said.

Factory

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