Balance of Payments - CAD widens on high gold imports :Edelweiss

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Current Account Deficit (CAD) widened to ~USD17bn (3.7% of GDP) in Q2FY12 against upwardly revised ~USD16bn in Q1FY12 due to a rise in imports even as exports and remittances went up. Imports were higher owing to elevated oil imports and buoyant gold imports (~USD12bn over and above USD16bn in Q1) while exports were strong due to buoyancy in engineering goods and petroleum products. On the capital account, net inflows at ~USD17.2bn were just enough to fund the CAD with the main support coming from debt-related inflows - ECBs and short-term credit - although portfolio flows were negative.   

Going forward, we expect CAD to shrink in H2, reaching 3%-3.2% of GDP in FY12 on account of a slowdown in non-oil imports as the domestic economy is slowing and gold prices are softening. Moreover, a sharp INR depreciation (on nominal and REER basis) would not only support exports and import-competing goods but also boost remittance flows. On the capital account side, FII flows are likely to remain weak while ECB flows might ease too, given the stress in EU banking system. However, an increase in FII limits on domestic debt and rise in foreign currency deposit rates would surely help.