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'2013 CAD to be 4.3% if fall in commodity prices sustained'

Last Updated: Thursday, April 25, 2013 - 18:08

New Delhi: The fall in global commodity prices, if sustained, is likely to lead to a "positive terms of trade shock", improving the current account deficit to 4.3 percent in 2013, from the earlier projection of 5.3 percent, according to a Nomura report.

"For a net commodity importer such as India (oil and gold account for 45 percent of total imports), the recent fall in commodity prices is tantamount to a positive terms of trade shock," Nomura said.

This fall will likely lower WPI inflation, help moderate CAD and reduce the government's fuel and fertiliser subsidy bill - providing much-needed breathing space to policymakers.

"...If commodity prices are sustained at today's lower levels, the current account deficit may improve by around 1 percent of GDP to 4.3 percent in 2013, from our base case of 5.3 percent," Nomura said, adding, "this remains high and financing it will continue to remain a concern".

CAD represents the difference between inflows and outflows of foreign currency. It had touched a historic high of 6.7 percent of the GDP in the October-December quarter.

Earlier last week, gold suffered the biggest loss of Rs 3,250 in four sessions. It is trading at Rs 26,350 per 10 grams, its lowest level since August 17, 2011.

According to Nomura, the recent fall in gold price will likely reduce India's gold import bill as every USD 100/oz decline in gold price reduces India's gold import bill by USD 3 billion. Likewise, every USD 10/bbl fall in oil price lowers India's net oil import bill by USD 9 billion.

On the inflation front, the report said food inflation is likely to remain sticky, but lower commodity prices and a stable currency should help ease input cost pressures.

"Overall, India's macroeconomic imbalances will likely improve at the margin due to the exogenous positive shock, yet if the fall in commodity prices persists it can be expected to create room for more rate cuts, helping to pave the way for a cyclical recovery," it added.


First Published: Thursday, April 25, 2013 - 18:08
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