 "India's current account deficit to rise to 5% in FY14: BofA-ML")
The CAD, which occurs when a country's total imports of goods, services and transfers is greater than the country's total export of goods, services and transfers, continues to be high due to excessive dependence on oil, coal and gold imports and slowdown in exports.
The CAD had touched a record high of 5.4% of GDP in the July-September quarter.
"We expect large current account deficit to persist as long as we live in a world of low growth, hurting exports and high liquidity. Pumping up the oil import bill will likely persist till 2014," the report said.
Moreover, trade statistics are likely over-estimating oil imports by 0.7% of GDP.
Giving details, the report said the Commerce Ministry's April-January oil imports, at $140 billion, is far higher than Oil Ministry's $127 billion (including gas imports).
Going ahead, some easing in the CAD is likely as it is expected to fall to 3.8% of the GDP in FY14 with statistical corrections and some steadying in coal and gold imports, the report said.
The best defence against high CAD levels is surely for the RBI to recoup forex to arrest falling import cover, BofA ML said adding that there are three options, RBI easing to revive growth and attract FII equity inflows; re-issuing NRI bonds and hiking FII debt limits.
"We expect the RBI to cut policy rates by 25 bps each on March 19 and May 3 and OMO to improve bank liquidity so as to pull down lending rates to revive growth and attract FII equity flows," the report said.
The trade deficit in January widened to $20 billion, the second highest rise ever in a month. The biggest trade gap of USD 21 billion was recorded in October, 2012.
The Reserve Bank of India has also expressed concerns over high CAD and said that a high CAD will threaten macroeconomic stability and impact growth.
"Large fiscal deficits will accentuate the CAD risk, further crowd out private investment and stunt growth impulses," RBI had said in its third quarter monetary policy review.
Over the last few months, the government has taken several steps to boost dollar inflows like de-regulating NRI deposit rates, relaxing ECB norms, increasing FII debt limits, liberalisation of FDI and postponement of GAAR and higher duties on gold.