CAD to narrow to 0.5% of GDP in 2016: Nomura report

According to the report, India's CAD may narrow owing to lower commodity prices, particularly oil

India's current account deficit may narrow to 0.5% of GDP in 2016 from 0.7% in 2015 owing to lower commodity prices, particularly oil, says a report.

"Given lower oil prices, we expect the current account deficit to narrow to 0.5% of GDP in 2016 from 0.7% in 2015, despite weak exports and strengthening domestic demand," the report by financial services major Nomura said.

The current account deficit, which occurs when the value of imports and investments is larger than value of exports, is expected to narrow to 0.5% of GDP in 2016 largely owing to lower commodity prices, particularly oil.

The report noted that export volumes are likely to remain sluggish on account of weak global demand, while import volumes would rise mainly due to strong domestic demand and real effective exchange rate appreciation.

According to official figures, exports contracted for the 13th month in a row in December 2015, as outward shipments shrank 14.75% to $22.2 billion amid a global demand slowdown.

Imports also plunged 3.88% to $33.9 billion in December over the same month previous year.

However, gold imports shot up which increased the trade deficit to a 4-month high of $11.66 billion as against $9.17 billion recorded in December 2014.

Commenting on the trade data, Nomura said that these mirror the diverging growth trends between domestic demand and external demand.

"We expect export volumes to remain sluggish (weak global demand) but import volumes to rise (stronger domestic demand and real effective exchange rate appreciation)," the report added.

The CAD in the July-September quarter of current fiscal rose to $8.2 billion or 1.6% of the GDP from 1.2% or $6.1 billion in the April-June quarter.