DBS pegs Q1 current account deficit at 4% on gold import surge

The current account deficit may have widened to 4 per cent of GDP in the first quarter due to a surge in gold imports and a deteriorated trade gap, a report said today.

"Our estimates for a shortfall in the current account of about $23 billion, are close to 4 per cent of the gross domestic product. The reasons for the same are two--a sharp jump in gold imports and deterioration in the trade balance," a report by DBS Bank said.

The RBI will release the June quarter current account deficit today. Government aims to contain current account 3.7 per cent of GDP for the entire fiscal.

Meanwhile, a finance ministry official said: "Moderation in exports is likely to have pushed India's current account deficit for the first quarter of FY 2014 fiscal to about 5 per cent of Gross Domestic Product(GDP) as against 3.9 per cent in April-June 2012."

For the April-June period this fiscal, exports were down by 1.41 per cent at $72.45 billion. However, imports during the period were up by 5.99 per cent at $122.6 billion.

DBS said trade deficit rose 10 per cent to $51 billion in the April-June quarter, signalling a wider CAD, despite an anticipated pick-up in the service receipts.

Trade deficit has been fuelled by high imports of gold and crude oil, contributing to the widening CAD, which touched an all-time high of 4.8 per cent of GDP, or $88.2 billion, in FY 2013.

The DBS report said the country's financing ability was eroded due to significant outflow from the equity and debt markets since late-May caused by the fear of rollback of monthly asset purchases by the US Federal Reserve.

"The FII equity inflows maintained strength in April-May before witnessing modest outflows in June. The debt counterpart, however, fared poorly as the scale of June 13 outflows reversed the inflows seen in the prior eight months," the report said.

The country, on net basis, registered outflows in the quarter, the DBS Bank report said.

The offshore borrowings in the June quarter slowed significantly and are likely affected by rupee depreciation and financial uncertainties, the report said.

The rupee depreciated nearly 9.5 per cent in the April-June quarter as FIIs pulled out money on concerns over early withdrawal of easy money policy by the US Fed.

The report said the preferable non-debt creating flows, i.e. foreign investment flows in the meantime, fell 19 per cent. "Sign of renewed weakness in the CAD, despite being backward looking, could trigger worries," DBS Bank said.