Analysts have pegged the full-year current account deficit target at under 2 percent of India's GDP following a massive improvement in the third quarter.
Mumbai: Analysts have pegged the full-year current account deficit target at under 2 percent of India's GDP following a massive improvement in the third quarter, when it dropped to an eight-year low of 0.9 percent, but warned CAD will be close to 3 percent the next fiscal.
While the Q1 CAD, the difference between outflow and inflow of foreign exchange, stood at a high of 4.9 percent, it improved to 1.2 percent in Q2 and to 0.9 percent, or USD 4.1 billion, in Q3 of the current fiscal from 6.5 percent a year ago. In FY13, the gap was at a record high of 4.8 percent, or USD 88 billion.
The improvement was largely owing to curbs on gold imports, stronger exports and weak domestic demand. As a result the net capital account swung into a surplus of USD 23.8 billion in Q3 from a deficit of USD 5.4 billion in Q2 on one-off accretion under the forex swap window.
"We expect the CAD to be at 1.9 percent of GDP in FY14, but may widen to 2.5-3 percent in FY15," Sonal Verma of Japanese brokerage Nomura said in a note.
She attributed the improvement to a higher invisibles surplus, as outflows on investment income (on equity and investment fund shares) moderated. In addition, even as export growth moderated (7.5 percent in Q3 from 11.9 percent in Q2), imports fell more sharply (-14.8 percent against -4.8 percent), keeping the trade deficit contained.
On the net capital account swinging into a surplus of USD 23.8 billion in Q3 from a deficit of USD 4.8 billion in Q2, she said this was due to a one-off accretion under forex swap window wherein USD 21.4 billion came in as NRI deposits.
Excluding this, capital inflows were only marginally positive as higher inflows under FDI, portfolio inflows and external commercial borrowings were offset by outflows on short-term trade credit, other capital and repayment of overseas borrowing and a build-up of overseas foreign currency assets by the banking system, Verma said.
In a note, DBS Bank said the bulk of CAD improvement came from near 40 percent fall in merchandise trade deficit, which was a combination of modest pick-up in exports (up 7.5 percent) along with a sharp drop in imports (-14.8 per cent) much due to lower gold purchases and softness in non-gold non-oil demand.
However, the DBS report said key risks to CAD will be reversal of the gold import curbs along with any sign of upstick in domestic consumption and investment demand, which could see the gap widen past 3 percent of GDP.
Aditi Nayar of rating agency Icra said the FY14 CAD print will be at USD 35-37 billion, roughly 2 percent of GDP.
"Even if gold imports curbs continue, CAD may be USD 45 billion in FY15. Any revival in domestic consumption or investment impulses would boost growth of non-oil, non-gold imports in FY15, which have undergone a contraction in the current year. Moreover, the coal import volume is set to rise, exerting pressure on the trade deficit," she warned.
HSBC said the CAD reduction was led by higher income inflows.
"Looking ahead, deficit is likely to remain contained in the near term, although a gradual relaxation of the gold curbs could see it creep up again.
"If we get an investment-led recovery next fiscal, that could gradually widen deficit as domestic demand for capital goods pick up. However, that would help improve the quality of deficit and, therefore, the ability to finance it," the foreign lender said in a note.
The main contribution to CAD improvement came from lower net primary income outflows of USD 5.4 billion as against USD 6.3 billion in Q2 and higher secondary income inflows which include remittances of USD 16.4 billion vs. USD 16.1 billion in Q2, HSBC noted.