Fall in gold, oil prices will narrow CAD to 4.3%: Nomura

Japanese brokerage firm Nomura today said the recent fall in gold and oil prices can help improve India's elevated current account deficit (CAD) by one percentage point to 4.3% during 2013.

"If commodity prices are sustained at today's lower levels, the current account deficit may improve by around 1% of GDP to 4.3% in 2013, (down) from our base case of 5.3%," it said in a note.

It, however, added that the CAD will still be high and "financing it will continue to remain a concern".

It can be noted that CAD has hit a historic high of 6.7% in the December quarter of the fiscal 2012-13, leaving everyone worried and the full fiscal is going to end with a CAD of over 5%, making it a major worry for the policymakers.

There has been a large correction in the gold and oil prices over the last fortnight, which has ushered in optimism on the macroeconomic front for the country.

"This will likely to lower WPI inflation, help moderate the current account deficit and help reduce the government's fuel and fertiliser subsidy bill – providing some much-needed breathing space to policymakers," the Nomura note said, adding India is among the "biggest winners" because of correction.

It said the gold import bill go down by USD 8 billion because of the price effect and there will also be an additional benefit because of the decline in volumes as it looses lustre as an investment item.

Similarly, it said a fall of USD 10 per barrel of crude oil will help lower the net import oil bill by USD 9 billion.

On the inflation front, it said lower commodity prices and stable currency will ease input cost pressures and bring down the wholesale price inflation sharply.

"We estimate CPI inflation to be only 0.60% lower than our baseline assumption at 9.2% year-on-year (y-o-y) in 2013. WPI inflation should fall sharply to 5.6% y-o-y in 2013, 1.60% below our current forecast, due to the higher weight given to commodities in WPI basket," it said.

This will, in turn, help the Reserve Bank ease its policy rates by 0.75% during the year, against the 0.25% estimated earlier, the Nomura note said.