CAD in comfort zone; could increase in FY15

Current account deficit will increase modestly in FY15 as Gold imports increase.

May 28, 2014 10:45 IST | India Infoline News Service

India’s current account deficit declined sharply to a 20 quarter low of 0.2% of GDP in 4Q. Lower gold imports explains ~60% of the decline in CAD in 4Q. Current account deficit will increase modestly in FY15 as Gold imports increase. However capital flows are likely to exceed the current account deficit and thus RBI will continue to add to its reserves. This will also be a source of domestic liquidity and in all likelihood RBI will not need to do any OMOs in FY15. The INR is likely to be range bound with a slight upside bias as the RBI will want to protect the Rupee’s value in REER terms.

4Q CAD moderates sharply: India’s Current Account Deficit (CAD) moderated further to a 20-quarter low of 0.2% of GDP (US$ 1.3bn) in 4QFY14 from 0.9% of GDP (US$4bn) during 3QFY14 and 4.9% of GDP in (US$ 22bn) 4QFY13. For full-year FY14, India’s CAD was 1.8% of GDP (US$32bn), down from almost 5% of GDP (~US$90bn) in FY13. With capital flows exceeding deficit, there was accretion to the reserves of ~US$15bn, excluding valuation changes.

India’s CAD improved sharply for the third consecutive quarter

Source: RBI, CSO, IIFL Research

Even excluding gold imports, CAD did improve.

A large part of the improvement in CAD during the past few quarters was due to lower gold imports, pursuant to the import restrictions. However, even excluding gold imports, CAD improved sharply. For the first time in 12 quarters, 4Q saw a modest surplus on the current account, excluding gold imports. For full-year FY14, although headline CAD improved by almost US$55bn, gold imports declined by only US$17bn. Thus, lower gold imports accounted for only ~30% of improvement in CAD. The other 70% improvement reflects weak domestic demand, which weighed on non-gold imports, improvement in exports, and higher services and remittance inflows.

CAD improved sharply even excluding gold imports

Source: RBI, CSO, IIFL Research

Export growth slowed sharply in 4Q: Overall exports declined 1% YoY in 4Q after ~6% growth in 3Q and more than 10% growth in 2Q. The decline was largely due to lower petroleum and Jewellery exports and excluding these items export growth was positive in 4Q. However, even excluding these categories, export growth slowed.

Current account deficit should increase slightly in FY15: We expect India’s CAD to increase modestly in FY15 to ~US$35bn (~2% of GDP), reflecting a slight increase in gold imports. With concerns on current account waning, we expect the government to relax restrictions on gold imports gradually. Thus, gold imports are likely to increase from the current depressed levels. We have assumed a US$10bn increase in gold imports in FY15. However, non-gold imports are likely to remain sluggish (2-3% growth) since domestic economic activity is unlikely to see a sharp uptick. Further, given a weak currency, we also expect import substitution to start playing out in certain industries.

Source: IIFL Institutional Equities

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