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Cheap gold and crude may put brakes on CAD

Cheap gold and crude may put brakes on CAD

With the international prices of crude oil, gold and edible oils falling sharply in the international market, current account deficit is expected to come down due to the lower import bill.

With the international prices of crude oil, gold and edible oils falling sharply in the international market, current account deficit (CAD) is expected to come down due to the lower import bill. CAD is the amount by which the country's export earnings fall short of its imports reflecting a fundamental weakness in the economy, which exerts downward pressure on the rupee.

If this declining trend in commodity prices holds, CAD could come down to around three per cent in 2013-14 compared with around four per cent projected earlier, according to fresh estimates of Barclays and the Royal Bank of Scotland (RBS) released on Wednesday.

Gold prices , after dropping Rs 3,160 in the last three trading sessions, fell by another Rs 90 to Rs 26,350 per 10 grammes on Wednesday, the lowest level since August 17, 2011. Gold prices had crashed on Monday and continue to plunge over concerns that central banks of debt-ridden European nations might follow Cyprus in selling their gold reserves.

The prices of the Indian basket of crude oil imports, which have been hovering between $105 and $110 per barrel, have come down to $97.90 per barrel. The Indian import basket comprises 68.2 per cent of the cheaper Gulf crudes and 31.6 per cent of the more expensive sweet crude benchmarked with UK's Brent variety.

Similarly, the prices of edible oils have declined by around 27 per cent in recent months. "The immediate and most visible impact would be on the current account balance, which could improve by nearly one per cent of GDP in FY13-14 on our estimates," Barclays said in a research note. The brokerage expects the current account deficit to be at 3.2 per cent of GDP compared with their earlier estimate of 4.1 per cent in the current fiscal assuming gold prices stay at $1,400 an ounce and oil prices remain at $100 per barrel.

RBS expects the current account gap to be around 3.1 per cent due to declining gold and oil prices. "Prima facie, the reduction in the current account deficit should provide RBI with greater headroom for policy easing," RBS said in a note. "Depending on whether these lower international prices are sustained or not, we will be revisiting our policy rate forecasts."

CAD shot up 6.7 per cent of GDP in the October-December quarter driven by huge imports of oil, gold and vegetable oils. Exports could not keep pace with imports due to the recession in Europe and uncertain recovery of the US economy. CAD works out to 5.4 per cent of GDP during the 10-month period between April and December.

Finance minister P. Chidambaram considers CAD an even bigger worry that fiscal deficit. This is because although fiscal deficit can be financed through domestic borrowing, CAD can only be bridged through foreign exchange. With foreign direct investment inflow plumetting, the country has become increasingly dependent on foreign capital flow into the stock market to finance CAD. But this is hot money as it can go out at short notice and is therefore not considered to be a reliable way of financing the deficit.

Courtesy: Mail Today 

Published on: Apr 18, 2013, 12:10 PM IST
Posted by: Navneeta N, Apr 18, 2013, 12:10 PM IST