Not expecting some pick-up in exports in FY14: HDFC Sec.

With rising merchandise deficit, India's CAD touched an all time high of USD 32.6 billion in 3QFY13. Remittances and software exports were below estimates.

Led by higher debt and equity inflows, India managed to finance the highest ever CAD. FDI inflows were lower. Going forward, we do see some improvement in trade deficit and CAD. Even so, the quantum will remain large at USD 92 billion in FY14E (4.5% of GDP).
 
With flat exports and 9.4% YoY increase in imports, India's merchandise trade deficit jumped to USD 59.6 billion in 3QFY13, (+) USD 11 billion YoY. Most of the increase in imports was led by oil and gold.

Led by sharp outflows in investment income, India's net invisibles income fell to USD 27 billion in 3QFY13 from USD 29bn in 3QFY12.  Investment income related outflows increased to USD 6.5billion (USD 3.9bn in 3QFY12). Net services growth was muted at 9.2% YoY. Poor services growth was led by mere 1% YoY growth in software exports. Remittances fell by 4% YoY to USD 15.7 billion.

Correspondingly, current account deficit jumped by 61% YoY to USD 32.6 billion, (+) USD 12.4 billion which is  6.7% of GDP. During Apr-Dec FY13, India’s CAD has jumped to USD 71.7 billion or 5.4% of GDP.

Such a high CAD could be financed by surge in capital inflows (USD 31.8 billion). The largest share in capital inflows was that of loans, particularly short term credit, which increased to USD 10.6 billion in 3QFY13 from USD 1.6billion in 3QFY12.

Net portfolio investment also increased to USD 8.8bn in 3QFY13 compared with USD 1.9 billion in 3QFY12. On the other hand, FDI inflows declined to USD 2.5bn from USD 5.0bn in 3QFY12. Banking capital inflows worth USD 5.3 billion also helped (-USD 5.5 billion in 3QFY12).

Even with such a high deficit, foreign exchange reserves during the quarter increased by USD 781 million to USD 296 billion (28 Dec 2012). India's foreign exchange reserves have declined marginally to USD 292 billion as of Mar 2013.

Commenting on the data, HDFC Securities said "Trade deficit during Jan-Feb 2013 at USD 35.7 billion has not shown as sharp a deterioration as seen in Apr-Dec 2012. Hence, we expect 4QFY13 merchandise deficit at USD 52.3 billion. We see CAD at USD 24.4 billion or 4.5% of GDP in 4QFY13.

Even though we do expect some pick-up in exports in FY14E, we still see India' CAD at USD 92 billion in FY14E or 4.5% of GDP. This is 20bps higher than our previous estimate of 4.3% of GDP."

''Given India's reliance on short-term trade credit and FII inflows to finance CAD, rupee will continue to remain volatile. We see rupee in Rs 54-58/USD range in the near term,'' it said.


Source : myiris.com