Mumbai, Oct. 10: The monster called current account deficit (CAD) appears to have been tamed, thanks to a drop in India’s trade deficit.
However, the good news does not end there.
In what may come as a major relief to the government and the RBI, experts say that CAD may come down sharply this year, dipping way below North Block’s projection of $70 billion.
On Thursday, Standard Chartered Bank sharply cut its CAD forecast to $45 billion for this fiscal from its earlier projection of $71.8 billion.
CAD is the difference between inflows and outflows of foreign currency and it has been blamed as a key factor that led to the depreciation of the rupee, which touched nearly 69 levels against the dollar in August.
The forecast comes a day after trade deficit fell to a 30-month low of $6.7 billion in September as the restrictions imposed by the government on gold imports and a drop in oil purchases led to a contraction in imports. The month also saw exports rising 11.15 per cent even as imports fell 18.10 per cent. For the second quarter, trade deficit stood at $29.8 billion compared with $50 billion in the preceding three months.
In 2012-13, CAD rose to 4.8 per cent of GDP (gross domestic product) from 4.2 per cent in 2011-12. In absolute terms, it stood at $88.2 billion. However, for the first quarter of this year, the deficit came in lower than expected at $21.8 billion, or 4.9 per cent of GDP.
“With softer trade deficit numbers for the last four months, the second quarter trade deficit has dropped to $30 billion from $50.5 billion in the first quarter. This improvement gives us increased confidence in our view that India’s current account deficit problem has been overblown,” said StanChart economists Samiran Chakraborty and Anubhuti Sahay.
They said while trade deficit might inch up again in the third quarter as gold imports might rise because of the festival season, the trade deficit figure should benefit from seasonal effects in the fourth quarter. The foreign bank forecast that export growth would remain robust in the second half with full-year exports close to the government’s estimate of $325 billion.
Though non-oil, non-gold import growth could register positive growth again, oil imports could be subdued in this period.
“The 2013-14 current account deficit could be close to half of its 2012-13 level after this improvement in the trade balance. Policies to address the current account deficit seem to have worked and investors will now have one less macro challenge to worry about in India,” they added.
Another factor seen the CAD number are the inflows from software exports and remittances that are expected to rise to nearly $ 71 billion and $ 71.2 billion respectively.