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CAD during 1QFY2014 surprises positively, at 4.9% of GDP

During 1QFY2014, the Current Account Deficit (CAD) came in at USD21.8bn (4.9% of GDP) as compared to USD18.2bn (3.6% of GDP) in 4QFY2013 and USD17.1bn (4% of GDP) in the corresponding quarter of the previous year. This is lower than market expectations of a deficit amounting to USD23bn owing to higher-than-anticipated invisibles. Excluding the USD7.3bn increase in gold imports during the quarter as compared to 1QFY2013, the CAD would translate to 3.2% of GDP.  

The trade deficit worsened to 11.3% of GDP (USD50.5bn) in 1QFY2014 as compared to 9.0% of GDP (USD45.6bn) in the previous quarter and 10.2% of GDP (USD43.8bn) in 1QFY2013. This can be attributed to a 1.5% yoy decline in merchandise exports along with import growth of 4.7% yoy. Invisibles reported 7.2% yoy growth with net inflow of USD28.7bn, higher than USD27.5bn in the previous quarter and USD26.8bn in 1QFY2013. Amongst its components, net services exports came in at USD16.9bn aided by a decline in service imports even as exports moderated. Net outflow on account of primary income stood at USD4.8bn led by the USD5bn outflow of investment income. Transfers came in at USD16.7bn, flat on a yoy basis. The capital account witnessed inflows to the tune of USD20.5bn similar to last quarter’s level supported by banking capital and FDI inflows. Net FDI inflows surged by 70% yoy to USD 6.3bn even amidst FII outflows of USD225mn. The outflow of FII investments was mainly led by debt outflows after the US Fed indicated the possible tapering of quantitative easing. Net overseas borrowing by banks increased by 57.5% yoy to USD4.7bn from USD3.0bn in 1QFY2013. On the whole, there was a drawdown of foreign exchange reserve amounting to USD346mn during the quarter. 

We expect the CAD to narrow significantly during 2QFY2014 led by export growth so far in July and August 2013. The CAD is expected to narrow meaningfully to 3.8% of GDP in FY2014 from 4.8% in FY2013. We expect the moderation to be driven by improvement in external demand resulting in pick-up of exports, curtailing of imports particularly of gold and exports of software services benefiting from INR depreciation. The focus of policymakers is likely to remain on financing of the CAD gap. In this regard, the government has hiked import duty on gold thrice this year to 10% and the RBI has linked gold imports to exports. To attract capital flows in the economy, the government has liberalized FDI caps in some sectors, increased FII limit of investment in government debt, permitted public sector financial institutions to 
raise quasi-sovereign bonds for long-term infrastructure needs etc. Higher shortterm rates by the RBI are also expected to attract debt-related flows in the economy. At the same time, the RBI has opened a concessional window for banks for swapping FCNR(B) deposits and raised overseas borrowing limit for banks to 100% of unimpaired Tier I capital and the borrowings swapped at a concessional rate of 100bp below the market rate. Source: Angel Broking

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