CAD falls to 0.9% of GDP in Q3; lowest in 4 years

May come down below 2% this fiscal; BoP turns positive

Raising hopes that curbs on gold imports would be eased, India’s current account deficit (CAD) for the quarter ended December stood at $4.2 billion, or 0.9 per cent of the gross domestic product (GDP), a sharp fall from $31.9 billion (6.5 per cent) in the year-ago period. The fall resulted from a pick-up in exports and moderation in imports, especially of gold.

According to news agency Bloomberg, the deficit in the December quarter was the lowest since 2010. For the quarter ended September 2013, CAD stood at 1.2 per cent ($5.2 billion). Experts pegged CAD for the entire financial year at about $35 billion, or two per cent of GDP. This could be the first time in four years that the CAD will be within the central bank’s comfort zone of up to 2.5 per cent. For 2012-13, the CAD had widened to a record 4.8 per cent of GDP, or $88 billion.

S K Ghosh, chief economic advisor, State Bank of India, said while the CAD for the December quarter was a little higher than estimated, for the entire financial year, it could be about $35 billion, less than two per cent of GDP. On gold import curbs, Ghosh said, “We can’t continue with curbs. For 2014-15, the CAD could rise to 2.5 per cent of GDP, which is within RBI’s comfort level,” he said.

On Wednesday, Finance Minister P Chidambaram said the government would revisit the gold import curb once the CAD data for the entire financial year was available.

Aditi Nayar, senior economist at rating agency Icra, said in 2014-15, investment demand for gold was likely to remain muted if the customs duty was kept unchanged at 10 per cent, inflation moderated to an extent and the price of gold remained range-bound.

“However, demand for gold for jewellery purposes is likely to be considerable in 2014-15, particularly following a healthy rabi harvest. As a result, in FY15, the value of gold imports will depend on policy decisions on the continuance of quantitative restrictions on the import of the precious metal,” Nayar said.

In tandem with the improvement on the current account front, the balance of payments moved to positive territory. During the quarter ended December, $19.1 billion was added to India’s foreign exchange reserves, against the addition of a mere $0.8 billion in the year-ago period. In July-September 2013, a drawdown of $10.4 billion was recorded. For the nine months ended December 2013, the CAD stood at 2.3 per cent of GDP ($31.1 billion). For the corresponding period of 2012, it was 5.2 per cent ($69.8 billion).