India's current account deficit (CAD) narrowed sharply to 1.7% of GDP in the April-June quarter of this fiscal mainly on account of reduction in trade deficit, and a steep decline in gold imports. Check out
CAD—wider but comfortable.
1QFY15 CAD/GDP worsened to 1.7% with deterioration in both trade balances and net invisibles. However, capital flows were robust on account of foreign investments, thereby leading to a comfortable BOP surplus of US$11.2 bn. For FY2015, we expect CAD/GDP at 1.7% (US$36.1 bn), unchanged from FY2014. Even as our base case assumes a BOP surplus of US$20.8 bn, we alter our USD/INR average to 60.50 (earlier 59.50), based on current trends and a likelihood of rapid USD appreciation globally.
1QFY15 CAD widens…
CAD in 1QFY15 widened significantly to US$7.9 bn (1.7% of GDP), as against US$1.3 bn in 4QFY14 (0.3% of GDP). This was led by an increase in the trade deficit to US$34.6 bn from US$30.7 bn in 4QFY14. However, CAD was much better than the US$50.5 bn in 1QFY14 primarily due to restriction on gold imports. Importantly, non-oil imports were higher in 1QFY15 from 4QFY14, probably signaling a rising economic growth momentum. While yoy exports growth was at 10.6%, risk to the merchandise deficit going forward is faster-than-expected domestic growth (pushing up non-oil, non-gold import growth) and slower global growth (lowering export growth).
Invisibles receipts eased in 1QFY15 with net software receipts at US$17.0 bn and transfers at US$16.4 bn. Net interest outgo from India continued to be a large drag on invisibles in 1QFY15 and was at (-)US$6.8 bn.
…buffered by capital flows
1QFY15 capital inflows have been much robust at US$19.9 bn compared to US$9.2 bn in 4QFY14. Net FDI inflows accelerated to US$8.2 bn (mainly towards the telecom sector), net FPI was also stronger at US$12.4 bn (election impact) against US$9.3 bn in 4QFY14. ECB flows slowed to US$1.7 bn while banking capital was also weaker on account of higher repayments of overseas borrowings. Overall, with capital flows remaining comfortable, BoP registered a surplus of US$11.2 bn in 1QFY15.
FY2015 CAD/GDP seen at 1.7%
We see CAD/GDP for FY2015 at 1.7% with crude price at US$107.5/bbl, with the benefit to CAD/GDP obvious if crude price is lower. The government has allowed star trading houses to import gold under the 80:20 scheme and thus we expect gold imports for the year being higher at US$33 bn from US$27 bn last year. However,