| Date: |
09-12-2014 |
| Subject: |
CAD gap widens to $10.1bn on gold imports |
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India's current account deficit (CAD) - the gap between import payments and export receipts - widened sharply to $10.1 billion in the second quarter of FY15 due to high gold imports. Economists are forecasting that the lower oil import bill might get partially offset by an increase in gold imports thanks to Reserve Bank of India's (RBIs) relaxation of gold import norms.
The rising deficit may not have a major impact on the value of the rupee since foreign capital flows have more than made up for the trade deficit. According to a research report by HSBC, the Indian rupee has outperformed the region, supported by strong portfolio inflows and reform optimism, while improving macro data also helped. "This story should continue in 2015, in our view. Although foreign equity inflows moderated slightly in early Q4, and foreign institutional investors have nearly exhausted their $25bn limit in government bonds, the improvement in the CAD and the real interest rate profile will likely sustain the Rupee's steady performance in 2015 aided by fall in commodity prices", the report added.
The balance of payment (BoP) - the difference between all fund inflows and outflows including overseas capital investments - stood at a surplus of $6.9 bn during July-September. This is the fourth consecutive quarter of surplus. The second quarter last year had seen the BoP position turn negative with a $5bn deficit as foreign institutional investors sold government bonds in the wake of the volatility triggered by the US Fed tapering off its financial stimulus. Gold imports during the quarter stood at $7.6bn, twice the amount of imports in the same quarter last year. The total capital account surplus stood at $18.7 bn during the second quarter marginally lower than $19.8bn in the previous quarter.
"We do expect the CAD to remain slightly elevated in the range of 2-2.4% of gross domestic product (GDP) for the next 2 quarters. The denominator -- GDP growth -- will be pressurized by both lower farm growth and government expenditure. Further, low inflation will diminish the nominal value of GDP. Exports would be under pressure, and while imports will benefit from low crude prices, gold imports would counter this benefit to an extent," said Madan Sabnavis, chief economist, Care.
"The widening of the CAD in line with our expectations, following the rise in gold and non-oil non-gold imports and subdued growth of merchandise and services exports," said Nayar, Senior Economist, ICRA Ltd. "With recent indicators reiterating a bleak growth outlook for the Euro Zone and Japan suggest a muted real growth of Indian exports in the remainder of this fiscal. Merchandise imports are expected to record a low rise from USD 466 billion in 2013-14 to around $465-470 bn in FY15, with the decline in commodity prices dampening the pressure on the overall import bill. Following the sharp correction in the price of the Indian crude oil basket, we expect net oil imports to decline to around $ 85 bn in FY15 from around $101 bn in FY14," she added.
Source : timesofindia.indiatimes.com
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