CAD likely to remain lower in Q3 and Q4: India Ratings

Indian Flag image via Shutterstock

Pick-up in exports and decline in gold imports are likely to keep the country's Current Account Deficit lower during the rest of the fiscal as compared to the same period last year, a report said today.

"We expect the CAD to be lower in the remaining quarters of the FY14 than the corresponding quarters in FY13 in view of a pick-up in exports and a significant drop in gold imports," India Ratings today said in a research report.

In the July-September quarter, CAD narrowed to $5.2 billion, or 1.2% of GDP, as against $21 billion, or 5% of the GDP, in same period of last fiscal.

Gold imports in Q2, 2013-14 dropped to $3.6 billion, from $16.4 billion in the April-June quarter due to hike in duties and other measures taken by the government to curb the inward shipments of the commodity, the report said.

The report believes that despite the uneven global recovery, the momentum witnessed in exports growth will continue in the near term as there are signs of improvement in both the US and the core economies of Eurozone.

According to a recent estimate by International Monetary Fund, the US economy is expected to grow at 1.6% in 2013, while Germany and France are expected to grow at 0.5% and 0.2%, respectively.

"An improvement in the demand conditions in advanced economies coupled with rupee depreciation is helping merchandise exports," the India Ratings report said.

Merchandise exports increased 11.9% to $81.2 billion in Q2 FY'14 from $73.9 billion in the first quarter.

Depreciation of the rupee has improved competitiveness of Indian exports, particularly of textiles and textile products, leather and leather products and chemicals, the report added.

It further said that though some increase in imports growth in second half of this fiscal is expected, it will be limited due to stable crude prices and lower gold imports.

However, the report said that due to the nuclear deal with Iran, the tension in the Middle-East is likely to ease leading to reduced volatility in crude prices.

Despite lower CAD in Q2, FY14, there was a drawdown of forex reserves to the tune of $10.4 billion from a drawdown of $0.2 billion in the same quarter last year, and $0.3 billion in Q1 FY'14 on a balance of payment (BoP) basis.

"A decline in CAD alone is not going to shore up the BoP, attracting inflows through the capital and financial account is equally important to improve BoP and reduce the pressure on rupee to depreciate," the report said.

Although attracting inflows through foreign direct investment (FDI) is always better, the other routes including the swap window introduced by the Reserve Bank of India will be helpful in the short term, the report said.

The Reserve Bank has mobilised $34 billion through a special swap window for FCNR(B) funds and banks' overseas borrowings.

The central bank closed the swap window that was opened in September this year to garner forex reserves and to help rupee stabilise, on November 30.