CAD likely to widen in Q2 of FY14: HSBC

Says deficit is likely to widen again as imports get a lift from seasonal demand and a gradual recovery in domestic demand

India’s current account deficit, which narrowed in the second quarter of this financial year, is likely to widen during the second half of 2013-14 as seasonal demand bring in more imports, an HSBC report says.

According to the global brokerage firm, the deficit is likely to widen again as imports get a lift from seasonal demand and a gradual recovery in domestic demand. Decline in gold imports and turnaround in exports helped narrow the current account gap to $5.2 billion, or 1.2 per cent of GDP, in the July-September quarter of this financial year. The current account deficit (CAD), the difference between the outflow and inflow of foreign exchange, was $21 billion, or 5 per cent of GDP, in the second quarter of the last financial year.

“Despite the narrowing of the deficit in recent quarters and successful measures to attract capital inflows, policymakers have to continue their efforts to reduce India’s vulnerability to external spillovers ahead of Fed tapering," HSBC Chief Economist for India and ASEAN Leif Eskesen said.

The country’s CAD is likely to narrow notably from last year, aided also by firming exports, however, policymakers should continue to reduce vulnerabilities ahead of the US Federal Reserve tapering, the report said.

The government has taken several steps, including increasing gold import duty to 10 per cent and restricting import of gold bars and medallions, to restrict the CAD. It has also taken measures to boost exports. “While deficit has narrowed and steps to improve its financing have been successful, policy makers should not rest their laurels and continue efforts to reduce vulnerabilities ahead of Fed tapering," the report said.

A lower CAD during the second quarter was primarily on account of a fall in the trade deficit as merchandise exports picked up and imports moderated, particularly gold imports. Both the government and the Reserve Bank of India (RBI) are expecting the CAD to be below $56 billion in the current financial year, compared with the record high of $88.2 billion, or 4.8 per cent of GDP last financial year.