Analysts say CAD gain seasonal, likely to improve this fiscal

Even as the country struggles with the current account deficit (CAD) touching a historic high, despite unexpectedly improving to 4.8 per cent of the GDP in 2012-13, analysts say it could moderate further.

CAD stood at 4.2 per cent of GDP in FY12.

Leading brokerages Nomura and Barclays on Thursday said slowing gold imports and cheaper commodities could help contain the deficit.

While Barclays pegged the current fiscal CAD at 3.9 per cent of GDP on the steep fall in the commodity prices, Nomura sees it at 4.3 per cent citing the same reason.

Both the brokerages, however, cautioned that financing the deficit will not be easy due to due volatility in fund flows.

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.

Nomura 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 per cent 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, the economists 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."

Along with releasing figures for the entire 2012-13 financial year, the Reserve Bank of India (RBI) earlier in the day also released data for the fourth quarter of 2012-13. Surprisingly, CAD improved to 3.6 per cent of GDP.

In the fourth quarter, CAD improved to $18.2 billion versus a historic high of 6.7 per cent of GDP, or $31.8 billion, in the third quarter.

CAD stood at $21.7 billion in the year-ago period.

Nomura said the 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-level on Wednesday.

With inputs from PTI