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India's current account deficit, which hit record high of 6.7% in December quarter, is likely to come at 5.1% of GDP for the full fiscal year 2013, Bank of America Merrill Lynch (BofA ML) said today.
"We think that the current account deficit (CAD) has peaked at 5.1% of GDP (earlier 5%) in FY13," BofA ML said in a report, adding that CAD in FY14 is likely to be 4.3% of GDP.
The investment banking major has hiked its FY'14 CAD forecast to 4.3% of GDP from 3.8% with slowing global recovery likely to delay export turnaround.
"In our view, the current account deficit will not come off to our 2.4% sustainable level as long as we live in a world of low growth-hurting export demand for engineering and textiles-and high liquidity-pumping up oil imports," it said.
It is not until 2015 that it expects growth to be sufficiently robust for the US Fed to hike rates, it added.
The current account deficit (CAD) represents the difference between inflows and outflows of foreign currency. The CAD had touched 5.4% of GDP in July-September quarter.
The CAD widened from 5.4% in Q2 (July-September) to a record high of 6.7% of GDP in Q3, driven mainly by large trade deficit, as per data released by RBI.
Moreover, a high deficit is likely to remain a drag on the rupee, BofA ML said adding that the rupee stalemate will persist till the RBI rebuilds forex reserves.
The forex market is witnessing a "Rupee Dilemma", and the government is likely to take various measures like withholding tax cuts (to 5% from 20%) for gilts and corporate bonds; hike FII debt limits with the RBI buying the FX leg; and floatation of NRI deposits.
Currently, the rupee is hovering around the 54 level against the US dollar.
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.
