Current account gap to narrow, but capital flows key: CLSA

Moneycontrol Bureau Brokerage house CLSA’s senior economist Rajeev Mallik expects India’s trade and current account deficits to shrink in the coming days because of lower gold imports. But he cautioned that consistent foreign money flows was crucial to keep the current account deficit on a leash. India’s trade deficit for August dropped to a 5-month low of USD 10.91 billion on a combination of increased exports and lower imports. This was on of the key factors that contributed to the 700-point plus jump in the Sensex on Tuesday. Yet, some caution may be in order. “The key issue will remain the adequacy and smoothness of capital inflows. It is worth bearing in mind that INR got hit despite the significant improvement in the trade deficit in the last 2-3 months,” writes Mallik in his note to clients. The government’s measures to curb gold imports are beginning to yield results, as seen from the sharp drop in gold imports in August. But Mallik warns that unless the government fixes the retail inflation problem, demand for gold will rise again. “Ironically, India is curbing gold imports without effectively addressing the still-high retail inflation. This is an important factor behind Indians’ high demand for gold,” writes Mallik.