Analysts see FY15 CAD rising to 2.1-2.6% on growing imports

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Current account deficit, which narrowed to 1.7 per cent of GDP in FY14, is likely to rise to 2.1-2.5 per cent this fiscal on higher imports of gold and other items as the economy improves, say analysts.

While Wall Street brokerage Goldman Sachs has pegged CAD at 2.6 per cent this fiscal, which is the highest forecast amongst a clutch of analysts, domestic rating agency India Ratings projects it at 2.1-2.2 per cent.

Bucking the overall trend, domestic brokerage Kotak Equities said expects the CAD to improve to 1.4 per cent of GDP at $ 28.3 billion and with likely healthy capital flows and better rupee level which it sees in the range of 57-61.

According to RBI data, FY14 saw CAD narrowing to 1.7 per cent of GDP from 4.7 per cent ($ 87.8 billion in FY13), while in the March quarter it shrunk massively to 0.2 per cent of GDP, which is a lowest since March 2009.

The RBI data showed that a massive contraction in the trade deficit, coupled with a rise in net invisibles receipts, resulted in a reduction of CAD to $32.4 billion from $ 87.8 billion (4.7 per cent of GDP) in 2012-13.

India Ratings said the remarkable turnaround in CAD is much better than the agency's forecast of $ 38.8 billion of (2.1 per cent of GDP) as the gains from curbs on gold imports was much higher and stood at $ 33.4 billion from $ 55.8 billion in FY13.

"However, we expect CAD to expand to $ 45.4 billion (2.1 per cent of GDP) in FY15 on the back of a mild industrial recovery," India Ratings said, adding its expects exports growth to increase in the near term in view of the WTO projection of 4.7 per cent growth in world trade in 2014.

It also expects a modest pick up in imports in FY15, as its sees stable crude prices, lower gold imports and limited upside in GDP growth.

"As per our initial estimate, in this fiscal CAD is likely to be in the range of 2.1-2.2 per cent. Even relaxation in gold imports could widen of CAD but prospects of exports going up with global recovery is also there," Axis Bank chief economist Saugata Bhattacharya told PTI.

In a report, Goldman said the CAD numbers were in line with its expectations. But said, "It expects the CAD to rise gradually to 2.6 per cent of GDP in FY15 due to a gradual increase in imports on better domestic demand, as well as some relaxation in gold import restrictions by the new government."

On the rupee, it expects some appreciation pressure on in the near term from greater portfolio flows. "However, we do not expect the rupee to appreciate significantly further due to the RBI's preference of building up reserves and preventing significant appreciation, the gradual worsening in the current account balance, and significant inflation differential with partner countries."

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