CAD to narrow in FY14, financing it is a concern: Analysts

Analysts expect current account deficit (CAD), which came in at a record high of 4.8% for FY13, to come down in the current fiscal, with some estimating it to go down to 4.3% levels.

 

Although rupee is depreciating, lower prices of gold and crude would help reduce CAD, identified by the Reserve Bank as a key risk for the country, they said.

 

"We expect the overall current account deficit to moderate to 4.3% of GDP in FY14, as lower gold imports and lower commodity prices are likely to more than offset the impact of rupee depreciation," brokerage firm Nomura said.

 

While its peer Bank of America Merill Lynch expect that CAD would narrow to 4.4%.

 

"It should ease to 4.4% of GDP in FY14 on lower oil and gold prices," it said.

 

Ratings agency Crisil estimated CAD to come at around 4.5% this fiscal.

 

Incidentally, policymakers have stated that CAD of around 3% is sustainable from the financing perspective. With expectation of CAD being 4.3% to 4.5%, there are concerns over financing of CAD given the record outflows from the country's markets recently.

 

"Financing CAD is a bigger challenge this year," Crisil said, noting that a possible winding up of bond purchases by the US Federal Reserve and waning interest in India as an investment destination can be the detrimental factors.

 

Crisil, however, expressed optimism on the rupee front, saying the recent fall in rupee, with the currency breaching the Rs 60 to a dollar mark, is a temporary phenomenon.

 

"Current flight of capital and plunge in rupee is a short term phenomenon and largely in response to the uncertainty around the impact of the Federal Reserve's pullback of quantitative easing," it said, adding that Government measures to prop up sagging economic growth will also help attract more capital.

 

Nomura, however, expects pressure on rupee to continue.

 

"We expect lower capital inflows to offset any benefit from a lower current account deficit, which will maintain upward pressure on rupee," the Nomura note said.