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Leading brokerages Nomura and Barclays today said current account deficit, which unexpectedly improved to 4.8% in 2012-13, but still at a historic high, could moderate further this fiscal on slowing gold imports and cheaper commodities.
They, however, cautioned that financing it will not be easy due to due volatility in fund flows. While Barclays pegged the current fiscal CAD at 3.9% of GDP on the steep fall in the commodity prices, Nomura sees it at 4.3% citing the same reason.
However, both warned that financing even a lower CAD this fiscal will be a problem in the face of fund outflows. Since May 27, FIIs have pulled out a whopping Rs 40,380 crore from debt and equities, after pumping in more than $15 billion into equities earlier.
The flight of capital began after US Fed chairman said he would turn the tap on his $85 billion monthly bond purchase programme, leading to a bloodbath on the global equities markets since then. Noumara India economists Sonal Varma and Aman Mohunta in a note said, "Financing the current account deficit this year will be the key challenge, as not only are there risks from lower portfolio inflows, but debt inflows such as short-term trade credit also suggest caution."
They further said, "The overall current account deficit to moderate to 4.3% of GDP in FY'14, as lower gold imports and lower commodity prices likely more than offset the impact of the rupee depreciation.
"In the backdrop of the rising risks to financing the CAD, they said, "overall, we expect lower capital inflows to offset any benefit from a lower current account deficit, which will maintain upward pressure on the rupee.
" Earlier in the day, the Reserve Bank released the CAD data for Q4 and for the whole 2013 fiscal, which surprisingly improved to 3.6% in Q4 of FY'13 and to 4.8% of GDP for the full fiscal, which is still a record high. In FY'12, the CAD stood at 4.2% of GDP. In Q4 of FY13, CAD improved to $18.2 billion or 3.6% of GDP versus a historic high of 6.7% of GDP in Q3 of FY13 or $31.8 billion, and lower than $21.7 billion in the year-ago period.
The consensus was $21 billion for the last quarter. For the full fiscal, CAD stood at $87.8 billion (4.8% of GDP) as against $78.2 billion (4.2% of GDP) in FY12. Nomura said CAD improvement is largely seasonal but also reflects a lower-than-expected trade deficit. The release of the balance of payments data two days ahead of schedule suggests that the RBI is trying to calm markets following the rupee breaching the 60 levels yesterday.
However, Barclays in a report said the improvement in the CAD will not help the rupee, which needs policy initiatives. "This easing in the current account deficit, however, should not have come as a major surprise as the improvement in the merchandise trade deficit in Q4 which stood at $46 billion from $58 billion in the previous quarter is largely known beforehand, and invisible inflows typically demonstrate a strong seasonal pattern in the January-March quarter," Barclays said. Barclays further said notwithstanding this better data print and weak domestic demand in the recent past, the FY13 CAD remained elevated at 4.8%, though a tad lower than our expectation of 4.9%.
"We expect commodity import bill to moderate in the near term, reflecting a relatively benign commodity price outlook, subdued domestic growth and likely softer inflation," Barclays said, adding that "nevertheless, such a deficit will still be too high for comfort and much worse than the long-term average of about 1.5%". It also warned that it expects the H1of FY14 CAD to be higher than the current levels, but did not put a number to it, however adding "the improvement in the deficit will mostly take place in the second half.
"On the rupee, which hit a life-time low of 60.72 yesterday, Barclays said the near-term policy initiatives are critical for the rupee, saying even though the "CAD print is certainly favourable, we think it will not offer much cheer for the rupee. "The sharp sell-off in the rupee against the dollar over the past month has so far sparked little reaction from policymakers.
Of late, the central bank seems relatively less averse to intervening. However, we feel that intervention alone may not be effective to help the rupee stabilise, especially given the current volatile global backdrop. "In our view, even though the current account deficit will likely improve slightly in the coming quarters, financing it will remain a challenge, especially if the Fed tapering expectations continue to rise," Barclays concluded.
However, Barclays in a report said the improvement in the CAD will not help the rupee, which needs policy initiatives.
"This easing in the current account deficit, however, should not have come as a major surprise as the improvement in the merchandise trade deficit in Q4 which stood at $46 billion from $58 billion in the previous quarter is largely known beforehand, and invisible inflows typically demonstrate a strong seasonal pattern in the January-March quarter," Barclays said.
Barclays further said notwithstanding this better data print and weak domestic demand in the recent past, the FY13 CAD remained elevated at 4.8%, though a tad lower than our expectation of 4.9%.
"We expect commodity import bill to moderate in the near term, reflecting a relatively benign commodity price outlook, subdued domestic growth and likely softer inflation," Barclays said, adding that "nevertheless, such a deficit will still be too high for comfort and much worse than the long-term average of about 1.5%".
It also warned that it expects the H1of FY14 CAD to be higher than the current levels, but did not put a number to it, however adding "the improvement in the deficit will mostly take place in the second half."
On the rupee, which hit a life-time low of 60.72 yesterday, Barclays said the near-term policy initiatives are critical for the rupee, saying even though the "CAD print is certainly favourable, we think it will not offer much cheer for the rupee.
"The sharp sell-off in the rupee against the dollar over the past month has so far sparked little reaction from policymakers. Of late, the central bank seems relatively less averse to intervening. However, we feel that intervention alone may not be effective to help the rupee stabilise, especially given the current volatile global backdrop.
"In our view, even though the current account deficit will likely improve slightly in the coming quarters, financing it will remain a challenge, especially if the Fed tapering expectations continue to rise," Barclays concluded.
