India's current account deficit for the first quarter of 2014 improved to 0.2 per cent of GDP at $1.2billion, compared to $4.2billion (0.9 per cent of GDP) in the previous quarter. This was the lowest quarterly reading on the current account deficit since Q1 2009, according to the latest report by US-based investment bank Goldman Sachs. In seasonally adjusted terms, current account deficit was 0.4 per cent of GDP compared to 0.8 per cent of GDP last quarter.
“This improvement was largely in line with our expectation of a current account in balance in the March quarter and was driven by a continued reduction in the trade deficit due to a relatively larger decline in imports compared to exports,” said the Goldman Sachs report.
Capital inflows moderated to $9.2 billion, due to lower FDI inflows and reduction in non-resident deposits after the expiry of the RBI dollar swap facility in November last year.
For FY14, the average current account deficit was 1.7 per cent of GDP against 4.7 per cent of GDP in FY13 mainly due to a sharp contraction in imports, the report pointed.
“We expect the current account deficit to rise gradually in FY15 to 2.6 per cent of GDP due to a gradual increase in imports on better domestic demand as well as some relaxation in gold import restrictions by the new government,” added the report.
On the currency front, Goldman Sachs expects some appreciation pressure on the rupee in the near term from greater portfolio flows and a Balance of Payment surplus.
“However, we do not expect the rupee to appreciate significantly further due to the RBI's preference of building up reserves and preventing significant appreciation, the gradual worsening in the current account balance and India's significant inflation differential with partner countries. Our dollar-rupee forecasts are 58.5, 61 and 63 over 3, 6 and 12 months,” the report added.