Nomura sees current account deficit 4.2%

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SummaryThe current account deficit may touch 4.2 per cent of gross domestic product in this fiscal as well, as upside risks to the external environment are rising for the economy, brokerage firm Nomura said today.

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 output contracted by 0.4 per cent in September, even as CPI inflation remained sticky and non-oil driven spike in imports pushing up the trade deficit to a record high since 1994.

"While firms usually build inventory pre-festival seasons, we believe that power outages may have constrained production this year, resulting in firms drawing down on inventory to meet demand.

"This trend likely continued in October as the stock of finished goods index. In addition, consumer non-durables output growth moderated sharply reflecting lower summer crop production," Nomura said.

Stating that growth is bottoming-out, and not falling, it said growth in the intermediate goods output, a precursor to final demand, remains positive and, on a three-month moving average basis, IIP growth was 0.5 per cent y-o-y in September from a trough of minus 0.7 per cent in May.

Also, excise mop-up accelerated by 17.5 per cent in September from 0.3 per cent in April. Similarly, import growth, excluding oil and gold, is also trending higher.

"Therefore, we believe that the IIP data may be overestimating the growth slowdown. More likely, we believe that the industrial cycle is bottoming-out. Unlike the past, we expect a longer period of consolidation in this cycle due to weak exports, lacklustre investments and moderating consumption demand."

It also blamed the government's wheat procurement programme saying it has created an artificial scarcity in the market pushing up prices, while pulses prices have risen due to lower output.

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