Current Account Deficit (CAD) hits a record-high at 6.7% of GDP in 3QFY2013 - Angel Broking

As the trade deficit deteriorated, India's CAD widened to a record-high of 6.7% of GDP (USD 32.6 billion) in 3QFY2013 as compared to 5.4% of GDP (USD 22.6 billion) in the previous quarter and 4.4% of GDP (USD 20.2 billion) in 3QFY2012. For the nine months of FY2013, the CAD has widened to a much higher 5.4% of GDP (USD 71.7 billion) as compared to 4.1% of GDP (USD 56.4 billion) in the corresponding period of FY2012.

The negatives: The trade deficit widened to US$ 59.6 billion in 3QFY2013 from USD 48.3 billion in the previous quarter as imports of goods (9.4% growth) were largely led by oil and gold imports while exports growth remained flat. The trade deficit surged to 12.3% of GDP during the quarter. Exports in services also reported 2% decline to USD 36.5 billion in 3QFY2013 as compared to a growth of 6.4% in the corresponding quarter of the preceding year. Transfers on account of remittances declined to USD 14.8 billion from USD 15.6 billion in the corresponding quarter of the preceding year. Also, outflow from primary income came at a higher USD 8.9 billion as compared to USD 6.1 billion in 3QFY2013 largely due to fall in investment income receipts and rise in investment income payment.

Capital inflows remained strong and net inflows totaled USD 31 billion owing to FII inflows as FDI inflows deteriorated to USD 2.5 billion. However, FII inflows in debt instruments increased and it raises concern over the quality of financing. On a BoP basis, there was an accretion to the foreign exchange reserve by USD 0.8 billion during the quarter.

Going forward, we anticipate an improvement in the number during 4QFY2013 in the range of 4.2% - 4.7% of GDP as the trade deficit has moderated in the previous two months. Gold and oil imports are expected to be lower as the import duty bears effect and crude prices have moderated as compared to the previous year. Improvement in the trade deficit for the fourth quarter is also largely due to seasonal factors and it remains to be seen whether it can be sustained going ahead. We expect the CAD for the whole of FY2013 to inch towards 5% of GDP, up from 4.2% of GDP in the previous fiscal.

We believe that to boost exports in the interim, the foreign trade policy due this month is likely to enhance sops for the export-oriented sectors particularly in manufacturing since non oil, non gold imports also continue to remain high. In addition, a high CAD is also likely to reinforce the growth-supportive but stillcautious stance of monetary policy limiting the room for aggressive rate cuts.

Source : Equity Bulls

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