'CAD likely to be to 3.9% in FY'14 if gold prices see no hike'
New Delhi: Falling gold prices is "net positive" for the Indian economy and if the precious metal settles at current levels CAD is likely to be 3.9 percent in 2013-14, says a Bank of America Merrill Lynch report.
According to the research report, declining gold prices would narrow the current account deficit (CAD) so much so that a fall of USD 100 per ounce would compress CAD level by about USD 3 billion.
"Falling gold prices is net positive for India," BofA ML Chief Economist India Indranil Sengupta said in the report. "If gold settles at current levels, our FY 2014 current account deficit forecast will come off to 3.9 percent of GDP from 4.3 percent of GDP," he added.
CAD represents the difference between inflows and outflows of foreign currency. CAD had touched a historic high of 6.7 percent of the GDP in the quarter ending December.
Earlier last week, gold suffered the biggest loss of Rs 3,250 in four sessions. Gold is trading at Rs 26,350 per 10 grams, its lowest level since August 17, 2011.
"Gold investment demand is unlikely to revive in a hurry after the recent crash. With rural incomes slowing, we do not expect rural gold demand, another major source of rural demand, to rise substantially this year either," it added.
The report further noted that given the spike in gold loans in the recent years, it is only logical to expect stricter guidelines on bank gold loans in the coming May 3 RBI policy (which will address monetary as well as banking developments).
Financial services secretary, Rajiv Takru, has said that government banks would review loans backed by gold and call for more collateral if gold prices fall further.