Gold Imports To Dictate Size Of Current Account Deficit In H2 FY17: ICRA

Mumbai: The demand for gold in the remainder if this year is likely to influence India's current account deficit (CAD) in the second half (H2) of the current fiscal, ICRA said in a report here.

"With the gold import bill in October-November 2016 estimated to be nearly as high as the previous 6 months, the current account deficit in H2 FY2017, would significantly exceed the level for H1 FY2017. Moreover, the demand for gold in the remainder of this year would influence the size of the deficit in H2 FY2017," ICRA said in a report here. ICRA expects India's CAD to be curtailed under $20 billion in FY17, lower than the $22 billion in FY16.

"If the recent amendments to the Income Tax Act dispel demand for holding of gold as well as jewellery, the gold import volumes may decline significantly in the coming months," ICRA Principal Economist Aditi Nayar said.

"Assuming that the volume of gold imports during December 2016 to March 2017 reverts to the average of around 45 tonne per month seen in April-November 2016, the country's CAD would be curtailed at around $15 billion in FY2017," Nayar said.

However, if the volume of gold imports in the last four months of FY17 is elevated at an average of 70 tonne per month, driven by continued wedding demand, India's CAD could be as high as nearly $20 billion in FY17, she added.

The combined imports of gold, silver and precious and semi precious stones declined to $26.4 billion in April-October 2016 from $33.2 billion in April-October 2015, according to ICRA.

In contrast, exports of gems and jewellery rose to $26.4 billion in April-October 2016 (in line with the imports in that period) from $23.1 billion in April-October 2015. This indicated that either domestic stocks were drawn down extensively, or some imports were procured through unofficial channels, it opined.

Anecdotal evidence suggests a sharp rise in gold imports in November 2016, on the back of inventory replenishment, festive season and wedding demand as well as some impact of demonetisation, ICRA said.

The extent of demand for gold through official channels in the coming months would crucially affect the size of the current account deficit in H2 FY17.

ICRA expects gold prices to fluctuate in the range of USD 1,150-1,250 an ounce, driven by global trends. India's CAD shrank to a marginal $0.3 billion in Q1 FY17 from $6.1 billion in Q1 FY16, it said.

With the narrowing of the merchandise trade deficit in Q2 FY17 substantially larger than the fall in the services surplus, ICRA expects the current account deficit for the just-concluded quarter to print at $2.5-3.5 billion, less than half of the $8.5 billion recorded in Q2 FY16.

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