A lower CAD?

The rupee continued its free fall and crossed the psychological barrier of 55, touching an all-time low of 55.43 per dollar on Tuesday. While the outlook on the rupee continues to remain bleak due to weak macro-economy, there is some hope for the current account deficit emerging from the crude and gold price movement.

Since the beginning of this fiscal year Brent crude has fallen 12.4%, from $124.17 per barrel to 108.81 per dollar and gold prices have declined over 5%, from $1,677.68 per oz to $1,593.07 per oz. Since these commodities are the top two import items, the fall in prices bodes well for the CAD, said economists.

Rohini Malkani of Citi in a recent report said, “Lower oil prices, which makes up 30% of the import bill could make the vicious cycle turn virtuous. All macro forecasts incorporate crude at $125/bbl, thus if crude averages around $105/bbl, CAD would drop by $18 billion to 3% of Gross Domestic Product (GDP) or $59 billion versus the current estimate of 4% of GDP for FY13.”

Gold, which make up 10% of the import bill, has seen slowing imports. India’s gold imports plunged 29% year on year to 207.6 tonnes in the first quarter of 2012 according to the data from World Gold Council following the government’s recent measures to curb gold demand.

CAD swelled to 4% of GDP in FY12 from 2.7% in FY11 on account of higher gold and oil imports. Falling gold and crude prices could just be the ray of hope for the rupee to strengthen. However, government still needs walk down the path of fiscal consolidation and reduce oil imports.