ICRA expects the current account deficit to widen to US$ 40-45 billion in FY15

Lifting of restrictions on gold imports may widen the current account deficit by an additional US$ 10-15 billion

India's current account deficit (CAD) narrowed sharply to 0.2% of GDP in Q4FY14 from 3.6% in Q4FY13 and 0.9% in Q3FY14 due to decline in the trade deficit. CAD dipped to 1.7% of GDP ($ 32.4 billion) in FY2014 from 4.7% ($ 87.8 billion) in FY2013.

Aditi Nayar, Sr. Economist, ICRA, said, "The sharply lower print for India's current account deficit for Q4FY14 is largely in line with expectations, benefiting from the continuation of restrictions on gold imports as well as muted imports of capital goods following weak investment activity.

She added, "A strengthening of global growth impulses would support services and merchandise exports in FY15. However, elevated inflation is likely to erode the competitiveness of Indian exports, particularly if improved sentiments result in a sustained appreciation of the INR."

As per the ICRA a revival in domestic consumption or investment would boost growth of non-oil, non-gold imports in H2FY15. Even if the 20:80 scheme for gold imports is continued, ICRA expects the current account deficit to widen to US$ 40-45 billion in FY15. However, ICAR cautioned that the lifting of restrictions on gold imports may widen the current account deficit by an additional US$ 10-15 billion.

Nevertheless, ICRA indicated that the concerns regarding the vulnerability of India's external sector are likely to be limited in FY15. Notwithstanding the expectation that tapering of the US Federal Reserve's quantitative easing (QE) programme would continue over 2014, ICRA expects portfolio flows into India in 2014-15 are likely to exceed the level seen in 2013-14 on account of improved sentiments, a mild recovery in domestic growth and continued interest rate differentials with advanced economies.

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