While the Q1 CAD, the difference between outflow and inflow of foreign exchange, stood at a high of 4.9 per cent, it improved to 1.2 per cent in Q2 and to 0.9 per cent, or USD 4.1 billion, in Q3 of the current fiscal from 6.5 per cent a year ago. In FY13, the gap was at a record high of 4.8 per cent, or USD 88 billion.
"We expect the CAD to be at 1.9 per cent of GDP in FY14, but may widen to 2.5-3 per cent 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 per cent in Q3 from 11.9 per cent in Q2), imports fell more sharply (-14.8 per cent against -4.8 per cent), keeping the trade deficit contained.
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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 per cent fall in merchandise trade deficit, which was a combination of modest pick-up in exports (up 7.5 per cent) 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.