India Current Account gap likely to Widen

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.