Mecklai Graph: India's current account deficit for FY12.

The current account balance is referred to the difference between the exports and imports for a particular period. If imports are more than exports then the current account is in deficit and vice versa. This deficit is usually measured as a percentage of GDP.

In the last fiscal India's total import bill increased mainly on account of high crude oil prices and huge demand for gold and silver and as a result the current account deficit stood at 4% Vs 2.7% of GDP in FY11. With crude prices falling in the international market, the equation is expected to change in the current financial year and we can expect significant contraction in CAD in the following quarters. The deficit figures for Dec 12 qtr will be released tomorrow and which could be at historical highs of 4%, CAD may have peaked in FY12 and will gradually improve due to sharp depreciation of INR and falling oil prices. Every $10 drop in oil improves current account by 0.4 ppt of GDP; should oil prices remain at $90/bbl in FY13, CAD could fall to 2.3% of GDP.

Coupled with that the gold imports are also on a decline after GOI revised the import duty on gold to 4%. Any further reduction in current account deficit will help to restore the confidence in the Indian economy and revive the international investor’s sentiment which would ultimately support the rupee in the medium term.

Source : moneycontrol.com