Net capital inflows should be sufficient to finance the current account deficit so long as the medium-term growth outlook improves, says Nomura. However, other analysts feel the low current account deficit will not last.
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, forecasts Nomura in a research note.
Nomura expects 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 2014, says Nomura.
The current account deficit (CAD) narrowed further to 0.8% of GDP (US$4.1bn) in Q4 2013 from 1.2% (US$5.2bn) in Q3 2013 and relative to 4.2% in H1 2013. The improvement in CAD in H2 2013 was largely owing to curbs on gold imports, stronger exports and weak domestic demand. Also, the net capital account swung into a surplus of US$23.8bn in Q4 from a deficit of US$5.4bn in Q3 on one-off accretion under the forex swap window.
Overall, the balance of payments (BoP) recorded a surplus of US$19.1bn in Q4, a sharp swing from the deficit in Q3, says the research note. The following table gives BoP data at a glance:
However, according to Anand Rathi (another brokerage house), the somewhat favourable position on the current account deficit is too good to last. In 3QFY14, gold-import restrictions helped India register the lowest current-account deficit in 19 quarters (0.9% of GDP). NRI-deposit mobilisation under the swap scheme boosted the capital account and overall BoP surplus to US$23.8 billion and US$19.8 billion, respectively. But that the capital-account surplus, however, may slip as NRI deposit flows are likely to ebb. Over the longer term, it expects India to maintain a yearly CAD of around US$60 billion.
The Anand Rathi research note has a final warning in its forecast on the rupee and the current account deficit: “We, however, feel that the structural weakness of India’s external account–large CAD financed by uncertain capital inflows–continues. Despite the strength of rupee in the recent past, we expect the currency to depreciate by around 6% to Rs65 to the US dollar in the next 12 months.”
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