BofA-ML cuts FY14 CAD forecast to 3.2% from 4%

Bank of America Merrill Lynch (BofA-ML) today lowered its current account deficit (CAD) target for India for the current financial year to 3.2% of the GDP from 4% earlier.

"We have cut down the FY14 current account deficit (CAD) forecast to 3.2% of GDP (from 4.0% earlier) by pulling down the net gold import bill by $7 billion to $30 billion," BofA-ML said in a research note today.

According to the global financial services major, though CAD at 3.2% of GDP is significantly lower than the 4.8% it registered in fiscal year 2012-13 ", it still remains higher than the 2.4% of GDP that we estimate as the optimal current account deficit".

BofA-ML further said that "with restrictions pulling down gold imports, the monthly trade deficit has come off to $10-12 billion since June".

Moreover, the recent forex measures are likely to add a net $5 billion to the reserves, it added.

According to official figure, high imports of gold and oil pushed CAD to 4.9% of GDP at $21.8 billion in the April-June quarter of this fiscal.

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

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

Gold imports increased by $7.3 billion in the first quarter of current fiscal. The imports stood at about 335 tonnes in the April-June quarter.

The initiatives taken by the government and the RBI to contain import of gold and encourage flow of foreign funds into the country is likely to ease pressure on CAD in the coming quarters.

High CAD has put pressure on Indian currency, which touched a low of 68.86 to a dollar on August 28. It is currently hovering over the Rs 62/US dollar level.