India's CAD remains in check: Nomura

India's capital flows surge on one-off forex swap scheme, Nomura says

March 06, 2014 1:11 IST | India Infoline News Service
The CAD narrowed further to 0.8% of GDP (USD4.0bn) in Q4 2013 from 1.2% (USD5.2bn) in Q3 2013, a significant improvement from the 4.2% in H1 2013.
The improvement in Q4 over Q3 was largely owing to a higher invisibles surplus, as outflows on investment income (on equity and investment fund shares) moderated. In addition, even as export growth moderated (7.5% y-o-y in Q4 versus 11.9% in Q3), imports fell more sharply (-14.8% vs. -4.8%), keeping the trade deficit contained.
Meanwhile, the net capital account swung into a surplus of USD23.8bn in Q4 from a deficit of USD4.8bn in Q3 as a result of the one-off accretion under the forex swap window (NRI deposit flows stood at USD21.4bn in Q4, Nomura said.
Excluding this, capital inflows were only marginally positive in Q4 as higher inflows under FDI, portfolio inflows and external commercial borrowings were offset by outflows on short-term trade credit, other capital and repayment of overseas borrowing and a build-up of overseas foreign currency assets by the banking system. Overall, the balance of payments (BoP) recorded a surplus of USD19.1bn in Q4, a sharp swing from the deficit in Q3.
In the first three quarters of FY14 (year ending March 2014), the current account deficit stood at USD31.1bn, broadly tracking our full-year FY14 estimate of USD34.7bn, and a substantial improvement over a deficit of USD88.2bn in FY13. This improvement in H2 2013 can be pinned down to three factors:
The curbs on gold imports, along with lower gold prices, which will likely lower gold imports to around USD25bn in FY14 from USD53.8bn in FY13.
Stronger exports owing to better global demand, which has boosted exports in the textiles, leather, chemicals and iron and steel sectors.
Weak domestic demand, which has reduced the deficit in the non-oil, non-gold categories such as capital goods.
Looking ahead, as long as domestic demand remains weak, gold import curbs continue and a reasonable export recovery persists – of all which should hold in the coming months – the current account deficit should remain in check.
Nomura said, “We expect the current account deficit to be 1.9% of GDP in FY14, before rising to 2.5-3.0% of GDP in FY15 as gold curbs are removed and domestic growth starts to recover. Net capital inflows should be sufficient to finance the current account deficit so long as the medium-term growth outlook improves, which will crucially depend on the election outcome in May.”

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