CAD improves, but rupee seen in 61-65/USD band: Analysts

Moneycontrol BureauIndia’s current account deficit (forex inflows minus outflows) has shrunk to a four-year low of 0.9 percent GDP for the December quarter, but analysts do not expect the rupee to strengthen near term. Much of the improvement in CAD has to do with the restrictions on gold imports. The dollar swap schemes announced by the RBI, too have played an important role. But these are not lasting solutions. Gold import curbs will be eased at some point, overall imports will start rising as the economy recovers and dollars received under the swap scheme have to be repaid. The key to low CAD is a strong growth in exports, and while there has been improvement on this front of late, the health of the global economy will be key to sustaining it.That’s why most economists are expecting the CAD to widen in FY15 even if it stays below 2 percent of GDP for this fiscal.

Also read: Q3 CAD narrows to $4.2bn on lower trade deficitA quick look at what brokerages have to say:Nomura: We expect the current account deficit to be 1.9 percent of GDP in FY14, before rising to 2.5-3.0 percent of GDP in FY15 as gold curbs are removed and domestic growth starts to recover. Net capital inflows should be sufficient to finance the current account deficit so long as the medium-term growth outlook improves, which will crucially depend on the election outcome in May.Citi: The swap schemes announced by RBI have played a key role in stabilizing the rupee and recouping FX reserves to around USD 292 billion.However, the overhang of swaps can still be seen in the forward-adjusted reserves, which are down USD 19 billion from end FY13 levels. Looking ahead, despite an improvement in the CAD, we expect the rupee to remain in the Rs 61-64 range due to (1) EM Risk aversion and (2) a dip in forward-adjusted reserves.Goldman Sachs: The improvement in the overall balance of payments was heartening as it was driven by both a fall in the current account deficit as well as strong capital inflows. Given that the RBI temporary dollar swap facility has now expired, we don’t expect this magnitude of capital inflows to be sustained. However, we think the balance of payment is in a much stronger position now compared to early 2013. Our USD/INR forecasts are 62, 64 and 65 over 3, 6 and 12 months, below the respective forwards.Motilal Oswal: Rupee may see episodic volatility due to external factors. However, RBI now seem to move toward a managed float with 62/USD as the anchor and resorting to forex accretion when INR appreciates further. Hence, we expect some stability around this level while episodic volatility would remain.Anand Rathi: Several administrative measures (e.g., gold-import restrictions, NRI deposits under the swap scheme) have averted a seriousBoP problem during FY14. We, however, feel that the structural weakness of India’s external account–large CAD financed by uncertaincapital inflows–continues. Despite the strength of rupee in the recent past, we expect the currency to depreciate by around 6% to  around 65 to the US dollar in the next 12 months.