Current account gap to widen modestly to -1.6% of GDP in FY15/16 from -1.3% last year: DBS Report

Gold schemes to also help contain current account gap: DBS India expects Current ac­count gap to widen modestly to -1.6% of GDP in FY15/16 from -1.3% last year

Between April and August, gold imports have jumped 40% YoY as low global prices stoked demand and curbs were eased. Despite this rise, the metal's imports are way below 2010-13 highs. Back then, gold imports were the second highest import item behind crude oil purchases and had led to a wider current account deficit. Several restrictions imposed in 2013 saw imports drop ~70% in FY14, with investment-led demand for gold halving from year before.

With this in mind, there is a broader push to divert investment-related demand and lower reliance on gold imports. Beyond temporary curbs, the government recently approved a sovereign gold bond scheme and gold monetisation scheme (GMS). The schemes were first floated in the February budget and aim to a)channel investment-related demand for gold towards financial savings and b) better mobilise idle gold stocks with households and other institutions.

Of the two, the sovereign bond scheme (SBS) might have a higher chance of success, under which instead of buying gold in physical form, investors will be able to purchase sovereign bonds backed by the metal. Plans are to raise INR 150bn in the first tranche, carrying a return of 2-3% in addition to the capital appreciation pegged to global prices according to press reports. By contrast, under GBS, mobilising gold deposits held by households, religious institutions and trusts might be an uphill task. Few restrictions could also hurt its operational viability, for instance the form in which the metals can be deposited etc.

Overall, demand for gold has moderated sharply since last year on the back of administrative controls. Instead of physical assets (like gold) savings are likely to channeled back towards the financial assets, on better-faring asset markets, easing inflation and focus on deposit mobilisation. This should help contain the fallout on the economy's current account position, which has already got a timely hand from the sharp fall in global crude prices.

Factoring in weak exports that partly offsets the benefit from a lower commod­ity import bill and moderating services trade surplus, we expect the current ac­count gap to widen modestly to -1.6% of GDP in FY15/16 from -1.3% last year. The basic balance of payments (i.e. current account deficit plus net FDI) has also narrowed notably. Putting these factors together, worries over India's external balances are on a flash-point for the time being.

Source : Equity Bulls

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