Standard Chartered revises FY16 CAD upwards despite low commodity prices

Despite low commodity prices, India's fiscal deficit is set to widen on the back of slower economic growth worldover and slowing exports.

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Lower commodity prices are unlikely to narrow India's current account deficit, Standard Chartered has said, while revising its CAD forecast for the fiscal to 1.5% from 1.1% of GDP earlier.

According to the global financial services major, the positive impact of lower commodity prices are likely to be offset by a slowing export volumes due to weak global demand and the continued gradual recovery in the economy.

"We revise our FY16 CAD deficit forecast to 1.5% of GDP from 1.1%, despite lower commodity prices," Standard Chartered said in a research note adding that "weaker external demand and risk appetite to weigh on trade deficit, capital flows".

For the first quarter ended June 30, CAD narrowed to 1.2% of GDP at $6.2 billion following contraction in trade deficit and higher earnings from services exports.

The global brokerage firm has also revised down its fiscal
year 2015-2016 balance-of-payments (BoP) surplus forecast to $31.7 billion from $48.5 billion to reflect a wider current account deficit and lower capital flows.

Standard Chartered expects capital inflows of $64 billion in this financial year, down from its previous estimate of $75 billion, as "weak risk appetite is likely to keep portfolio inflows sluggish".

Portfolio inflows are likely to remain muted this fiscal year as investors are likely to stay away from riskier assets amid the current risk-averse environment.

"We lower our forecast for foreign portfolio investor (FPI) flows to $5 billion from $30 billion," the report said adding that during the first five months of this fiscal year portfolio investors have withdrawn $3 billion from India's equity and debt markets.

Portfolio flows accounted for close to 70% of capital inflows to India in fiscal year 2015. However, the composition of inflows is likely to improve in this financial year as more stable FDI flows and non-resident Indian (NRI) deposits stay robust, the report added. 

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