Current account deficit (CAD) set to dip in Q4, but rise anew in Q1

After worsening for two consecutive quarters, India’s current account deficit (CAD) is expected to improve from the last quarter of 2012-13.

However, the quality of capital inflows and weak exports will continue to be of concern.
India clocked current account deficit of $32.6 billion or 6.7% of gross domestic product (GDP) in the quarter ended December 2012.

Spurt in gold imports led to wider trade deficit pushing current account deficit to record high levels. Current account deficit was at $22.6 billion in the second quarter and $20.2 billion in the third quarter last year.

“We have trade deficit data for two months of fourth quarter which are better than the third quarter. So, that gives us hope that it will be lesser than 6% of GDP in fourth quarter,” said Samiran Chakraborty, head of regional research for South Asia at Standard Chartered Bank.

The trade deficit has improved to $15 billion in February 2013 from $20 billion in January and $17.6 billion in December 2012. Chakraborty expects current account deficit to be around 5.3% for current financial year.

Naina Lal Kidwai, president of FICCI and country head of HSBC India said exports may improve going ahead provided the external economic environment continues to improve and the government makes efforts to support exports in the forthcoming trade policy.

“This will help contain our current account deficit which might witness some moderation in the current quarter,” she said.

The Reserve Bank of India (RBI) had said in the mid-quarter monetary policy that current account deficit is expected to improve in the fourth quarter after sharp deterioration in the third quarter of the current financial year.

“However, we do not believe this is the start of a new trend,” said economists Sonal Varma, Aman Mohunta and Craig Chan at Nomura. They pointed out that current account tends to seasonally improve every January-March quarter. They expect trade deficit to start deteriorating again from April-May.

“In our view, domestic demand remains weak, India’s current account deficit is likely to remain elevated reflecting the supply-constrained nature of the Indian economy and global new norm of high oil prices and weak exports,” said economists from Nomura.

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