Some good news has emerged on the current account deficit (CAD), but where do the other factors stand? Check it out:
Comfort on both capital and current accounts
CAD/GDP for 3QFY14 remained comfortable at 0.8%, reflecting (1) favorable export dynamics, (2) lower non-oil, non-gold imports and (3) continued lower gold imports. While current account was in line with the 2QFY14 dynamics, capital account saw a sharp improvement owing to (1) NRI deposits and (2) FII flows. We expect CAD/GDP at 1.7% for FY2014 mostly on account of narrowing trade deficit. We expect CAD/GDP to remain benign in FY2015 at 1.1% with sufficient buffers on the capital account side. We expect USD/INR continuing in a range of 61-64 for the rest of CY2014 with the RBI shoring up its FX reserves on the back of stable capital flows.
1. 3QFY14 CAD at US$4.1 bn
2. CAD/GDP at 0.8%
3. Our new estimate for CAD for FY2015 is at US$27.3 bn
4. USD/INR expected to remain in a range of 61-64; RBI to continue shoring up FX reserves
CAD in 3QFY14 continues to be encouraging CAD in 3QFY14 was US$4.1 bn, in line with US$5.2 bn in 2QFY14. CAD/GDP in 3QFY14 was at a very comfortable 0.8% compared to 1.2% in 2QFY14. Most of comfort in the CAD was led by trade deficit remaining low at US$33.2 bn (US$33.3 bn in 2QFY14) on the back of weak imports. Non-oil imports growth of (-)23.4% in 3QFY14 reflected the weak domestic demand dynamics.
Invisibles receipts were more on a trend-line basis with software services net receipts at US$16.8 bn and transfers at US$16.4 bn. ’Other invisibles’ at (-)5.4 bn reflected the net interest outgo from India. With external debt accumulation on an uptrend for India, this component is unlikely to be lower in the next few years. For FY2015 we expect CAD to remain low at US$21.1 bn (CAD/GDP at 1.1%) under crude price assumption of US$102.5/bbl (Exhibit 1). We note that crude price at US$108/bbl would imply CAD at US$27.3 bn (CAD/GDP at 1.4%).
NRI deposits and FII flows-led capital account eases India’s external sector worries.
As expected, 3QFY14 capital flows have been much stronger at US$23.8 bn compared to (-)US$4.7 bn inflows in 2QFY14. The FCNR(B) deposit scheme started in September 2013 saw significant flows in October and November with NRI deposits in 3QFY14 at US$21.4 bn. We note