Current account deficit narrows sharply in Q3FY11 -Edelweiss

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India’s current account deficit (CAD) narrowed sharply to ~2.1% of GDP compared to 4.3% in the previous quarter, largely reflecting sharp rise in merchandise exports in Q3FY11 after a weak Q2. On capital account, FII flows moderated while weakness in FDI flows continued. Overall capital inflows of USD 13.7 bn were enough to generate a BoP surplus of USD 4 bn during the quarter. Shrinking of CAD definitely brings a relief given the fact that sharp widening CAD during April-September raised concerns among the investors and policymakers alike.

Going ahead, the monthly trade data for Jan-Feb 2011 show that export momentum continued although at somewhat slower pace. At the same time crude oil prices have been hovering at elevated levels and accordingly, one can expect CAD in Q4 to be higher than Q3. On yearly basis (FY11) we expect CAD to be around 2.6-2.8%. For FY12, crude oil prices are the major headwind for the current account deficit. At the same time, exports growth of ~40% observed in Q3 is much above the trend growth rate and is unlikely to sustain. Accordingly, we foresee current account deficit to reach ~ 3-3.2% for FY12. However, with the big-ticket FDI deals signed recently, the funding scenario of current account deficit has improved significantly.