DBS India expects CAD to widen to (-) 1.6% in FY'16

India's current account gap is likely to widen modestly to (-) 1.6 per cent of GDP in the current financial year from (-) 1.3 per cent last year, a DBS report says.
"Factoring in weak exports that partly offsets the benefit from a lower commodity import bill and moderating services trade surplus, we expect the current account gap to widen modestly to (-) 1.6 per cent of GDP in FY 15-16 from (-) 1.3 per cent last year," DBS said in a research note.
For the first quarter ended June 30, CAD narrowed to 1.2 per cent of GDP at USD 6.2 billion following contraction in trade deficit and higher earnings from services exports.

The global brokerage firm further said the basic balance of payments has also narrowed notably and added that "worries over India's external balances are on a flash-point for the time being".
According to the global financial services major, the gold schemes launched by the government would help to contain current account gap.
The global brokerage said the demand for gold moderated sharply since last year due to administrative controls and instead of physical assets (like gold), savings are likely to be channelled back towards the financial assets.

"This should help contain the fallout on the economy's current account position, which has already got a timely hand from the sharp fall in global crude prices," the DBS report said.

Under the Gold Bond scheme, the bonds are aimed at people buying the precious metal as an investment.
Such bonds will be issued in denominations of 5 grams, 10 grams, 50 grams and 100 grams for a term of five years to seven years with a rate of interest to be calculated on the value of the metal at the time of investment. However, there will be a cap of 500 grams that a person can purchase in one year.
According to DBS, "of the two, the sovereign bond scheme (SBS) might have a higher chance of success, under which instead of buying gold in physical form, investors will be able to purchase sovereign bonds backed by the metal".

Through the Gold Monetisation Scheme, approved by the Union Cabinet, gold in any form can be deposited with banks for a period of 1-15 years that will earn interest while redemption will be at the prevailing value at the end of the tenure.