Current a/c deficit to touch 4.4%, rupee 55-58: Ambit.

India's current account deficit (CAD) crisis is a well-recorded fact. At 4% of the gross domestic product (GDP) in FY12, alarm bells rang with the market experts terming the figure as a deal breaker for the Indian markets. However, this 4% deficit figure might be a best case scenario, if an Economy Report published by Ambit is to be believed. The report estimates India to touch a CAD of 4.4% of GDP for FY13.

According to Ambit, the rupee will depreciate further and head towards 55-58 against the dollar over the next 12 months. This is based on the fact that the size of the BoP balance (which is negative for India) is more powerful driver of rupee than RBI intervention.

Declining  exports:

To start with, exports fell for the first time since the 2009 global financial crisis in March this year, as demand weakened in the US and Europe. Taking a safe stand, Commerce Secretary Rahul Khullar had warned in January that exporters in India will face a “difficult year".

Even thought US GDP is expected to expand at 2.1% in CY12, it remains to be seen how much incremental support this will provide. On the other hand, India's reliance on Europe as an export destination is likely to compress growth given the turbulent times in Europe.

Imports continue to rise:

Petroleum products, gold and coal form a major chunk (nearly 50%) of the country's import bill.

Currently, over 70% of India's oil demand is met through imports and accounts to thirds of India’s import bill. Assuming that Brent averages at $120/barrel in FY13, the petroleum component is set to rise by 20% y-o-y.

When it comes to gold, India's affinity to the shining yellow metal is known. With stock markets remaining volatile and persistently high inflation Indian investors are eyeing gold as a safe haven, pushing up the demand for gold. In such a case, assuming gold averages at $1,670/oz, India's gold import bill is set to balloon by 24% y-o-y in FY13.

Coal imports are another sagging factor in the import bill. There is an estimated shortfall of 39MT between the obligated figures and the actual production figures with respect to Coal India. Assuming an extra 10GW coal based power plants in FY13, there would be an additional requirement of approx 16 million tonnes which would expand the shortfall to around 55 million tonnes. Adding to this, the imported coal based power plants are likely to consume about 24 million tonnes of coal which takes the total demand for imported coal to approx 80 million tonnes. If 40% of this requirement is to be imported, the coal import bill will increase by $2.5bn in FY13.

Apart from the above mentioned items, there are several others which are being imported on a regular basis adding further pressure.

It is no new fact that India perennially had a current account deficit but what makes the current deficit alarming this time around is that India’s capital account surplus won't be able to shield India’s balance of payments.

Source : smartinvestor.in