India's current account deficit to improve in FY'14

India's current account deficit (CAD) is likely to witness a "gradual" improvement in the next two to three years and it is expected to come down to 3.9 per cent of the GDP this fiscal, says a Barclays report.

"India's current account balance has weakened significantly since FY2010-11, but we expect an improvement over the next two-three years, albeit at a gradual pace," Barclays said in a research note.

CAD of a country represents the difference between inflows and outflows of foreign currency.

According to Barclays, India's CAD reached a record 4.9 per cent of GDP in FY2012-13 (about USD 90 billion) and on a conservative basis, it is likely to improve to 3.9 per cent of GDP (about $80 billion) in FY2013-14.

Surges in commodity prices and a spike in gold imports have been key factors denting the trade and current account balances in the past two years.

However, the commodity import bill is likely to moderate in the near term, reflecting a relatively benign commodity price outlook, subdued domestic growth and likely softer inflation, Barclays said.

It can be noted that CAD hit a historic high of 6.7 per cent in the December quarter of 2012-13, leaving concerns that the full fiscal is going to end with a CAD of over 5 per cent.

There has been a large correction in the gold and oil prices over the last fortnight, which has ushered in optimism on the macroeconomic front for the country.

While the current account deficit should soften this fiscal from the record high of 2012-13, the deficit is likely to average more than 3 per cent of GDP over the next three years, much worse than the long-term average of around 1.5 per cent, the report said.

Given the stubborn current account deficit, policy initiatives will need to continue to support capital inflows, Barclays said.

According to the report, a reduction in the withholding tax on government bonds is a strong possibility. Moreover, liberalising FDI rules and investment limits in debt are also likely.

Issuance of (quasi-) government bonds in foreign currency and/or INR bonds offshore might be useful to attract foreign inflows, in our view, it said.