Dalal Street Investments

India Current Account gap likely to Widen

December 31, 2009

India’s balance of payments (BOP) projections for 2QFY10E suggest that the current account deficit (CAD) is set to widen to over 3% of GDP from little over 2% in 1QFY10. Kotak expects trade gap to widen to US$29.8 bn in 2Q from US$26 bn in 1Q and CAD to widen to US$9.2 bn in 2Q from US$5.8 bn in 1Q.

Given the large discrepancy between RBI and DGCIS data on foreign trade, the trade gap could contain potential surprises. The discrepancy had widened sharply to nearly US$14 bn for 1QFY10 data, 2.4X of the current account gap itself, making reliable projections difficult.

Strong foreign investments likely to strengthen capital account – net FII inflow of over US$ 8 bn. Banking capital likely turning positive with US$3 bn inflows in 2Q versus outflow of US$3.4 bn in 1Q. Capital account had turned positive in 1QFY10 after US$9.6 bn of net outflows in the two preceding quarters.

The current account deficit increased significantly to US$12.6 bn (4.2% of GDP, annualized) in QE-Sept 09 compared with a deficit of US$5.9bn in QE-June 09. The market was expecting a current account deficit of US$5.6bn in QE-Sept 09. The current account deficit (excluding remittances) widened to 8.8% of GDP, annualized, in QE-Sept 09 compared with 6.4% of GDP in QE-Jun 09. On a trailing 4Q basis, current account deficit remained stable at 2.25% of GDP as of QE-Sept 09 from 2.3% of GDP as of QE-Jun 09.


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