CAD to be 1 per cent of GDP in FY16, says Citigroup

CAD to be 1 per cent of GDP in FY16, says Citigroup

India’s current account deficit (CAD) is likely to be about 1 per cent of the GDP in the current fiscal because of low crude prices and contained gold imports , says a Citigroup report.

According to the global financial services major, CAD is likely to be about $20.6 billion (1 per cent of GDP) in 2015-16, as against $28 billion (1.4 per cent of GDP) last year.

Though it’s still early to call the bottom on export contraction, we maintain our view of India’s current account deficit narrowing to around 1 per cent of GDP in FY16 due to low crude prices and contained gold imports, Citigroup said in a research note.

According to official figures, trade deficit in the first seven months of the current fiscal (April-October) has shrunk to $77.76 billion as against $86.26 billion last fiscal.

Citigroup said this figure reinforced its view of a likely compression in CAD, which is primarily the difference between the value of country’s imports and exports.

It also includes certain other components, which normally constitute a smaller percentage of the total. The report further noted that an improvement in exports, stable trend in non-oil non-gold imports, and an uptick in PMI new export orders augurs well for the economic activity in the near term.

India’s merchandise trade deficit narrowed for a third consecutive month to $9.8 billion in October largely due to a sequential increase in exports by 2.1 per cent on a month-on-month basis in seasonally-adjusted terms.

The CAD in 2014-15 shrank to 1.3 per cent of GDP ($27.5 billion) from 1.7 per cent ($32.4 billion) in 2013-14.

Banking major HSBC in its research report said that the quality of funding in the form of higher FDI has improved. As seen over the last two quarters, we expect FDI inflows to alone fully finance the CAD, it said.

We expect the CAD to be contained at 1 per cent of GDP this year and be fully funded by FDI flows, it added. Decline in oil and gold imports are the main reasons for continued improvement in the trade deficit, it said.