 "gold, jewellery")
With India's gold import bill in October - November 2016 is estimated to be equivalent to that in the previous six months, the country's current account deficit (CAD) for October '16 - March '17 is estimated to be significantly higher than that in the first half of the current financial year, rating agency Icra forecast in its latest study.
Moreover, the demand for gold in the remainder of this year would influence the size of the deficit in the second half of FY2017, it added. Icra expects India's current account deficit to be curtailed under $20 billion in FY2017, lower than the around $22 billion in FY2016.
"If the recent amendments to the Income Tax Act dispel demand for the holding of gold as well as jewellery, the gold import volumes may decline significantly in the coming months. Assuming that the volume of gold imports during December2016 — March 2017 reverts to the average of around 45 tonnes per month seen in April —November 2016, India's current account deficit would be curtailed at around $15 billion in FY2017," said Aditi Nayar, Principal Economist, Icra.
She added, "However, if the volume of gold imports in the last four months of FY2017 is elevated at an average of 70 tonnes per month, driven by continued wedding demand, India's current account deficit could be as high as nearly $20 billion in FY2017."
The combined imports of gold, silver and precious and semi-precious stones declined to $26.4 billion in April-October 2016 from $33.2 billion in April-October 2015. By contrast, exports of gems and jewellery rose to $26.4 billion in April-October 2016 (in line with the imports in that period) from $23.1 billion in April-October 2015.
This suggests that either domestic stocks were drawn down extensively, or some imports were procured through unofficial channels. Anecdotal evidence suggests a sharp rise in gold imports in November 2016, on the back of inventory replenishment, festive season and wedding demand as well as some impact of demonetisation.
The extent of demand for gold through official channels in the coming months would crucially affect the size of the current account deficit in H2 FY2017. The agency expects gold prices to fluctuate in the range of $ 1,150 - 1,250/ounce, driven by global trends.
Growth in the volume of crude oil imports would be muted in Q3 FY2017, following a temporary lull in trade-related activity post-demonetisation, as well as a step-down in irrigation-related demand for diesel given healthy reservoir levels.
However, following the agreement of the Organization of the Petroleum Exporting Countries (Opec), on November 30, 2016, to cut total crude oil production of its member countries by 1.2 million barrels per day from January 2017, crude oil prices are likely to be significantly higher at $55/barrel in December2016-March 2017, relative to $45/barrel in the first eight months of this fiscal. This uptick in crude oil prices is likely to inflate India's net crude oil import bill by a modest $4 billion in the remainder of FY2017, which Icra has built into its baseline projections.
India's current account deficit shrank to a marginal $0.3 billion in Q1 FY2017 from $6.1 billion in Q1 FY2016. With the narrowing of the merchandise trade deficit in Q2 FY2017 substantially larger than the fall in the services surplus, Icra expects the current account deficit for the just-concluded quarter to print at $2.5-3.5 billion, less than half of the $8.5 billion recorded in Q2 FY2016. As a result, the current account deficit in H1 FY2017 was likely subdued at under $4 billion.
