Q1 CAD better-than-expected; see more Q2 trouble: Experts

CAD at 4.9 percent is a good number, says Soumya Kanti Ghosh, chief economic advisor, State Bank of India. In absolute terms, CAD stood at USD 21.8 billion in Q1 against the projected USD 22 billion, he says. Going forward, this number will significantly decrease in the second quarter, he adds.

Also Read: Q1 current account deficit widens to 4.9% from 4% YoY
In the second quarter, assuming a trade deficit of around USD 35 billion, service exports at the same level of USD 17-18 billion and factoring in a robust growth in remittances, CAD could actually decline to around USD 9-10 billion in Q2, Ghosh told CNBC-TV18.
Though the market was expecting less than USD 20 billion, with CAD at USD 21.8 billion, it is quite likely that the rupee will move to 63, says Ajay Marwaha, head of trading treasury, HDFC Bank. But overall this is not a destabilizing number, he says. It is very much in line to achieve a USD 75-80 billion annual deficit, which is what we all are expecting, he adds.
A Prasanna, Chief Economist, I-Sec PD expects a number at or below USD 10 billion for the second quarter. However, he is quick to add, it is largely because gold imports have kind of collapsed close to zero. So, in a sense it is a bit artificial, he says. At this point of time, the expectation is gold imports would rebound and therefore both the trade deficit and the current account deficit numbers in Q3 would go up, he told CNBC-TV18.
Aditi Nayar, senior economist, ICRA, says the number is slightly better than what she expected. She had estimated CAD at USD 23 billion for Q1. According to her, another positive takeaway from the data is also the fact that net drawn down of foreign exchange is quite small. She was expecting it to be a little bit bigger. She is looking at an overall current account deficit of around USD 70-75 billion for the entire year. Below is the verbatim transcript of Soumya Kanti Ghosh, Ajay Marwaha, A Prasanna & Aditi Nayar's interview on CNBC-TV18 Soumya Kanti Ghosh, Chief Economic Advisor, State Bank of India Q: What are your thoughts on Q1FY14 Current Account Deficit (CAD) of 4.9 percent? Ghosh: 4.9 percent is a good number, because none of us were expecting a dramatic CAD number for the Q1 given that the trade deficit was at USD 50 billion. So it is a good number and it is actually on the lower side. It is lower than USD 22 billion which we have been projecting. The good thing is that going forward this number is going to significantly decrease in the second quarter. Q: What is your anticipation of the second quarter numbers? Ghosh: I have been looking at the numbers very closely. If I look at the trade deficit for the July-August, which has already been released, that has been trending around USD 22-23 billion. So September trade deficit numbers also will be in the range of USD 11-12 billion, so that makes it around USD 35 billion for July-September quarter.
The interesting thing is that the service exports if you look into, that has been trending upwards from April 1. If you look at April, it was USD 5.1 billion and in August if I remember the last numbers which were released for the service exports were around USD 6.4 billion. So at that rate, the service exports should also be around USD 17-18 billion and another positive development which has come is the NRI remittances which were average of USD 14-15 billion last year, but this year it is trending a little bit upwards, that we were expecting because of the huge currency depreciation.
So overall in the second quarter we expect a trade deficit of around USD 35 billion and if we are assuming that the service exports remained at the same level of USD 17-18 billion and factoring in a robust growth in the remittances, the CAD could actually decline to around USD 9-10 billion in the second quarter which could be the lowest from June 2011 when it was at 1.7 percent of GDP. Ajay Marwaha, head of trading treasury, HDFC Bank Q: How will the rupee react tomorrow? Marwaha: The rupee today saw an intraday small correction based on the initial thought process that the Current Account Deficit (CAD) should surprise us on the positive and I am not sure now how that reaction will pan out in the morning. Q: What was the surprise you all expected? USD 20 billion I heard, but what did you hear? Do you think the market was spoiling for something less than USD 20 billion? Marwaha: All of the rhetoric that has gone on over the last two weeks has been on positive surprises on the CAD. At this point in time that is what the market is clearly talking about, whether it anticipates and the quantum of positive surprises is anybody's guess, but clearly that was the kind of mindset, the thought process with which the market has gone into this number. So now you are going to have a situation which means people will start panning out to reality. The whole discussion also about trying to look at CAD without gold imports quite frankly does not arise. You have to look at gold as part and parcel. Q: What was the market's distance from reality? The reality is USD 21.8 billion. What was in the market's mind? What kind of reaction therefore, is the rupee 63 plus or will it just shrug it off because after all it is a lagged number?
Marwaha: There are two things to this. If you really look at a fairy tale thought process, the fairy tale was clearly below USD 20 billion which was kind of destroyed during the day itself when there was some kind of a remark from the ministry that is going to be around USD 20 billion or slightly higher than USD 20 billion. USD 22 billion quite frankly is par for the course as the original thought process was. The only thing is any kind of bias that was built into current levels, which was a positive bias if anything is going to get stripped away. So could we see 63? It is quite likely, but overall quite frankly this is not a destabilizing number by any stretch of imagination. It is very much a number which is in line, in target to achieve a USD 75-80 billion annual deficit which is what quite frankly what we are all expecting. A Prasanna, Chief Economist, I-Sec PD Q: Inline with your expectations, you told me USD 22 billion?
A: That is right. There is no surprise once the trade deficit number is known. The invisibles have been pretty much inline with what we had expected. Q: The software exports do you think have now stabilized? We should be growing from this number you think – software and other exports?
A: It depends on global outlook and particularly US outlook. So, we have to see how that kind of develops. Also, one would expect that currency depreciation would at some level have an affect – obviously not at the higher end of the value spectrum, but some parts of software exports should also benefit from the rupee depreciation. Q: You would agree that Q2 could be as good?
A: One should look at a number at or below USD 10 billion. I agree with whatever Soumya Ghosh just said about the trade deficit number. We have to remember that it is largely because gold imports have kind of collapsed close to zero. So, in a sense it is a bit artificial. Q: You are suggesting that Q3 looks bad because you would have relapse of gold imports because of the festive season as well as dollar which was costing 68 is very different from a dollar which is likely to be closer to 60. So do you think that CAD in Q3 will look very different? Could look much higher?
A: If you are talking relative to Q2 you could see an increase in Q3. You will have to look at the trade deficit number that will give us a sense of how the gold imports are performing, but at this point of time the expectation is gold imports would rebound and therefore both the trade deficit and the current account deficit numbers in Q3 would go up. Aditi Nayar, senior economist, ICRA Q: The current account deficit number itself and the string of other numbers that I reeled out – any of them of interest to you – private transfers, payments on old debt investment payments anything that is a shocker or a surprise?
A: Overall the number is slightly better than what we were expecting. We penciled in a deficit of around USD 23 billion for Q1 and possibly it is really the primary income number that is a little bit lower than what we were expecting. We thought that would be an outflow of about USD 6 billion and it seems to be about 4.8 percent so that is the main reason for the differential between our estimates and what has come in today.
Of interest is also the fact that net drawn down of foreign exchange is quite small. I was expecting that it might have been a little bit bigger, so this is a little bit of a positive takeaway from the data. Q: Have you worked any number?
A: For Q3 I think specifically for the quarter not yet – for the year as a whole we are looking at a overall current account deficit of around USD 70-75 billion.