India's CAD to swing into surplus in 2015: Morgan Stanley

The current account deficit has been narrowing steadily since 2012 to an estimated 1.6 per cent of GDP in 2014

India's current account which has been consistently in deficit over the last 10 years is likely to swing into a minor surplus of 0.3 per cent of GDP in 2015, says a Morgan Stanley report.

According to the global brokerage firm, improving terms of trade, coupled with declining global commodity prices (specifically oil), are likely to help current account to swing into surplus for the first time since 2004.

The current account deficit has been narrowing steadily since 2012 to an estimated 1.6 per cent of GDP in 2014.

"We now estimate that the current account will swing into a minor surplus of 0.3 per cent of GDP in 2015," Morgan Stanley said in a research note.

The major factors that would drive the current account to surplus include, improving terms of trade, helped by falling global commodity prices (specifically oil) and decline in gold imports, among others.

Since June, the prices of crude oil, of which India is a major importer, had fallen by close to 60 per cent and hit a six-year low of $47 this month.

Analysts at investment banks Goldman Sachs and Credit Suisse have pegged the bottom at about $37-39 a barrel.

The report noted that "The substantial improvement in India's current account deficit bodes well from a macro stability point of view and comes at a time when the US Fed is likely to embark on a hiking cycle."

CAD stood at 1.9 per cent in the first quarter of this fiscal (March quarter of 2014), at 1.1 per cent in the June quarter and at 1.3 per cent of GDP in the September quarter of 2014.

For the fiscal as a whole, the consensus CAD was 1.8 per cent of GDP.

Commenting on the improvement in the current account balance, the report added that it will protect India from external funding risks and give the RBI comfort in targeting real interest rates at more moderate levels.

The global brokerage firm believes that it expects the current account to move back into deficit in FY2017.

However, we estimate the deficit to be relatively small at 1.1 per cent of GDP, and well within policy makers' comfort zone of 2.5 per cent of GDP," the Morgan Stanley report added.