HSBC lowers India CAD forecast to 3.4 per cent

PTI Posted online: Friday, Oct 25, 2013 at 0000 hrs
New Delhi : Global financial services major HSBC today lowered India's current account deficit (CAD) forecast for this financial year to 3.4 per cent of GDP from 4.1 per cent earlier.

HSBC said the country's CAD is at an unsustainable level, and expected to gradually decline in the coming years and in 2014-15, it is likely to be at 3.2 per cent of GDP.

"We expect the CAD to narrow to around USD 62 billion in this fiscal (as against USD 88 billion in FY13), around 3.4 per cent of GDP. This compares to our previous forecast of USD 73 billion (4.1 per cent of GDP)," HSBC said in a research note.

HSBC's CAD projections factored the increase in imports during the festive season and rise in coal imports to help meet demand from power plants in the coming months.

In the next fiscal year, FY15, we expect the deficit to hold broadly steady in nominal terms and decline to 3.2 per cent of GDP.

CAD, the difference between inflow and outflow of foreign exchange, had declined to 3.6 per cent in the January-March quarter after touching a record high of 6.5 per cent in the October-December quarter.

The government plans to bring down CAD to 3.7 per cent or USD 70 billion in the 2013-14 fiscal, from 4.8 per cent or USD 88.2 billion in 2012-13.

HSBC said CAD has narrowed notably in recent months mainly driven by government steps to curb imports, especially gold. Moreover, the softening in domestic demand has dampened imports and helped contain the deficit.

"Encouragingly, the trade deficit has narrowed in recent months, led by slower domestic demand, a weaker currency and policy steps to curb imports. These factors should help narrow the CAD this and next year," HSBC said.

The report further noted that it is important to keep macroeconomic policies tight and step up the implementation of structural reform to further reduce vulnerabilities ahead of Fed tapering and make the CAD sustainable over the medium term.