The current account deficit for the current fiscal could be around 5 percent of the GDP, but it could decline to 3.5 percent next fiscal, says Bank of America Merrill Lynch chief economist Indranil Sengupta.
Current account deficit exists when a country’s total imports of goods, services and transfers exceed its total export of goods, services and transfers.
Sengupta estimates that the lower CAD next year will be driven by a stable oil import bill because of flattish crude prices, and a recovery in exports on a likely rebound in the global economy.
Sengupta says the RBI will have to start buying dollars because India’s import cover at about seven months is quite low.
He is expecting the central bank to cut the benchmark repo rate by 75 basis points through next fiscal. Sengupta does not see any problem in RBI cutting cash reserve ratio at its monetary policy review in May. India is the only country where lending rates are still at the peak levels seen in 2008, he points out.
Below is the edited transcript of his interview to CNBC-TV18.
Q: Yesterday, Rangarajan said in a statement that the current account deficit (CAD) will stay around five percent for FY13. What is your estimate on the CAD for FY13? Where do you think we will close it? What would be your perspective in terms of a trajectory for FY14? Where would this improvement come from if you forecast that?
A: We are looking at five percent of GDP for current account deficit in FY13 and 3.8 percent in FY14. We believe that oil imports have been over estimated at about USD 15 billion, which is 0.7 percent of GDP this year. If we assume that it gets corrected and oil prices stabalise, then we will see the current account deficit peaking off to 3.8 percent. It is also important to appreciate that some part of the current account deficit this year can be attributed to statistical reasons.
Q: What do you expect to hear on Thursday, when Q3 number will come out?
A: For the December quarter, we expect the CAD to be at USD 31 billion because during this time, the oil bill increased in the range of 30-31 percent, when oil prices were flat globally. This will clearly lead to a higher CAD which is already high.
Q: What percentage will it work out to?
A: Around 6.4 percent.
Q: You must be expecting a substantial decline in the fourth quarter that we will average at five percent?
A: Seasonally, the fourth quarter is always better where at least 30 percent jumps in oil imports seem to phase out. So, when both are put together it should make for lower CAD in the fourth quarter.
Q: What are the positives you see? There were reports that gold imports were high in January, perhaps not in February. What’s your expectation in FY14? How did you arrive at your forecast? What do you expect will move positive?
A: We expect the oil prices to remain flat, so beyond a point, the base takes over. Secondly, we expect some rebound in exports with global economy bottoming. Finally, at some stage maybe there will be a statistical correction.
Q: How do you mean statistical correction?
A: The difference is USD 15 billion in oil imports, between the oil ministry and petroleum ministry. Typically, these things tend to correct as happened in the past. So, we hope that at some stage oil bill will be lower next year.
Q: Considering that you expect a bit of a lower trajectory for the CAD in FY14 at 3.8 percent. Where would the RBI stand in terms of possible easing? Where do you think the trajectory would go for the RBI considering that they would possibly factor in a 3.8 percent as well or a lower CAD figure in FY14? Would they possibly ease before hand or do you think that they would like to look at figures in Q1 FY14, Q2 FY14 and then possibly start easing?
A: I am very clear that if there is easing then flows will increase and we will be able to finance the CAD. If there is no easing then flows will be less, the rupee will depreciates and we will fall into the inflation trap. So from this angle, I don't see the CAD as a constraint on easing.
Surely, at 4.5 percent growth, one cannot blame the current account deficit on growth. Lot of the CAD is due to global factors, there is low growth globally, so exports demand will remain weak, there will be high liquidity globally so oil bill will remain strong. Basically, we hope that the RBI cuts cash reserve ratio (CRR) on May 3. We expect a rate cut in June. In total, we expect a rate cut of 75 basis points.
Q: Overall, your report welcomed the removing of the sub-limits on corporate investments made by FIIs. Do you expect that the entire amount will get used up?
A: We are expecting an inflow of about USD 10 billion. The neutralisation limit is around USD 20 billion because many procedural issues need to be settled before flows starts coming in.
Q: Is that window still available to RBI, will there not be a discomfort factor with the total amount of debt as a percentage of reserves or debt as a percentage of total inflows going higher especially short term debt?
A: It is very important for the RBI to start buying foreign exchange (FX) because the import cover has come down to seven months and the external debt is also on the rise. I think at some stage the RBI needs to start to buy FX. Once FX is brought, investors get that comfort and rupee will turn. This is the most important thing now.
Q: What is the rationale behind your expectation of a CRR cut and what do you think is a level that would be comfortable with the RBI on the CRR, hence how much more headroom do we have from the current 4 percent that it currently is at?
A: The deposit growth stands at 13 percent and loan growth stands at 16 percent, and this is preventing lending rates from coming down at a time when your overall growth is down to 4.5 percent.
India is the only country in the world where lending rates are still at 2008 peak. So clearly, bank liquidity needs to be increased. The RBI has also mentioned the fact. That is really the rationale. As far as the CRR is concerned, now there is no issue in bringing it lower, because technically you can go down to zero now.