Gold price correction may ease current account gap

India's current account deficit could ease to around 3 per cent in the current fiscal year from prior estimates of about 4 per cent due to sharp drop in global commodity prices, two analysts said on Wednesday.

Gold, considered as a safe-haven asset, posted its biggest ever daily fall on Monday and has been languishing over worries that indebted euro zone countries might follow Cyprus to sell bullion reserves and the uncertainty surrounding the US Federal Reserve's stimulus programme.

"The immediate and most visible impact would be on the current account balance, which could improve by nearly 1 per cent of GDP in FY13-14, on our estimates," Barclays said in a research note.

The brokerage expects the current account deficit to be at 3.2 per cent of GDP, compared with their earlier estimate of 4.1 per cent in the current fiscal, assuming gold prices stay at $1400 an ounce and oil prices remain at $100 per barrel.

Royal Bank of Scotland expects the current account gap to be around 3.1 per cent due to the declining gold and oil prices.

"Prima facie, the reduction in the current account deficit should provide the RBI (Reserve Bank of India)

with greater headroom for policy easing," RBS said in a note.

"Depending on whether these lower international prices are sustained or not, we will be revisiting our policy rate forecasts," RBS added.

India's current account gap hit a worse-than-expected 6.7 per cent of GDP in the December quarter, driven by heavy oil and gold imports and muted exports. During April-December, the gap was 5.4 per cent of GDP.

Most analysts expect the current account deficit for 2012-13 to be at 5.1 per cent of GDP.

The central bank warned that high current account gap limited the scope of monetary easing, and has been highlighting the need to curb gold imports and raise fuel prices, which would help in easing oil imports to some extent.

"A reduction in oil under-recoveries would also reduce the necessity for domestic fuel price hikes, which contribute over 25 per cent to current inflation," Barclays said.

Brent crude had dropped to a level of $98 a barrel on Tuesday, the lowest since July 2012, on uncertainties over global economic recovery.

The RBI is scheduled to release its monetary policy statement for 2013-14 on May 3, and is widely expected to cut rates in its third straight policy to support weak growth.