India's current account deficit, which hit record high of 6.7 per cent in December quarter, is likely to be around 4.8 per cent of GDP in the March quarter, HSBC said in a research note.
Though trade deficit is expected to ‘narrow’ in 2013 driven by ongoing curb of gold imports and the gradual removal of fuel subsidies, the deficit will still be ‘sizeable’, it said.
According to HSBC Chief Economist for India and ASEAN, Leif Eskesen, India's current account deficit for the March quarter is likely to be around 4.8 per cent of the gross domestic product largely because, despite the reform efforts so far, the demand for oil and gold will only reduce ‘gradually’
The CAD represents the difference between inflows and outflows of foreign currency.
The CAD had touched 5.4 per cent of GDP in July-September quarter. The CAD widened from 5.4 per cent in Q2 (July-September) to a record high of 6.7 per cent of GDP in Q3, driven mainly by large trade deficit, as per data released by Reserve Bank of India.
With the still sizeable current account deficit, India is likely to continue to depend on portfolio inflows and external commercial borrowings to provide inflows, the HSBC report said.
As a short-term solution, India would need to raise the limit to allow more foreign participation in the bond market.
In addition, it would also need to loosen the regulations making it easier for foreigners to participate in the divestment of India's state owned enterprises, HSBC said.
In the medium term, India needs to take bolder actions to bring down the trade deficit (for example by pushing forward with fuel reform) and also further loosen regulatory requirements to allow more FDI into India, it added.
From a currency perspective, the large current account will remain a source of discomfort for the market and make it difficult for the INR to appreciate in a sustained manner.
Currently, the rupee is hovering around the 54 level against the US dollar.
Over the last few months, the government has taken several steps to boost dollar inflows like de-regulating NRI deposit rates, relaxing external commercial borrowing norms, increasing foreign institutional investors’ debt limits, liberalisation of foreign direct investment and postponement of General Anti Avoidance Rule and higher duties on gold.