CAD to move towards RBI's comfort level, say analysts

Full year CAD could likely stay in the range of $ 52-55 billion, implying around 2.9%-3.1% of the GDP

After India’s current account deficit (CAD) fell to 1.2 per cent of gross domestic product (GDP) in the quarter ended September, CAD for this financial year is expected to move closer to the Reserve Bank of India (RBI)’s comfort level of 2.5 per cent of GDP, analysts say.

Sonal Verma, executive director & India economist at Nomura, said the worst of the quarterly balance-of-payment data was behind us. A seasonal pick-up in imports will likely widen the CAD in the December quarter, she added. With the data for the September quarter in line with expectations, Nomura now estimates CAD at $45.5 billion in 2013-14.

RBI has pegged CAD at about $56 billion for 2013-14.

Indranil Sen Gupta, India economist at Bank of America Merrill Lynch, said, “The current account deficit expectedly narrowed to $5.2 billion in the September quarter from $21.8 billion in the June quarter. With gold import curbs working, we cut our FY14 current account deficit estimate 30 basis points to 2.5 per cent of GDP.”

Though there may be a rise in trade deficit due to a pick-up in economic activity, 2013-14 CAD is likely to stand at $52-55 billion, or 2.9-3.1 per cent of GDP, STCI Primary Dealer said in a research note.

For 2012-13, CAD stood at 4.8 per cent.

In a note, BNP Paribas said CAD was on course to halving between 2012-13 and 2013-14. India’s return to a small “basic-balance” surplus since the first quarter of 2009-10, combined with the authorities’ short-term policy fixes to boost funding sources, suggested the rupee seemed less vulnerable to swings in global risk appetite when the US Federal Reserve decided to taper its quantitative easing programme, it added.

YES Bank Chief Economist Shubhada Rao expects the fall in CAD to continue through this financial year. “Continued improvement in export performance and the expected traction in the inflow of invisibles are expected to support a lower reading on the current account deficit front. The bank expects CAD to be $50 billion (2.7 per cent of estimated GDP) in 2013-14,” she said.

Leif Lybecker Eskesen, chief economist for India and the Association of Southeast Asian Nations at HSBC, said in the September quarter, CAD had narrowed due to a pick-up in exports and a decline in imports. He added the deficit would likely widen in the second half of this financial year, as seasonal demand would see more imports. A gradual improvement in domestic demand would boost imports, though robust exports would help contain the deficit, he said.

Madan Sabnavis, chief economist, CARE Ratings, said though CAD for FY14 would be better than in FY13, it might exceed three per cent of GDP ($60 billion). While computer services export would continue to be on track, there would be a decline in remittance flows, with part substitution through foreign currency non-resident (bank) deposits.