What is current account deficit: It is the difference between a country's total imports of goods, services and transfers and its total export of goods, services and transfers. In layman terms, it means that India is a net debtor to the rest of the world.
Gold imports, a hefty oil bill and falling exports due to the global slowdown are the reasons behind India's high current account deficit. (Read: Current account deficit soars to record high)
Oil bill: Petroleum products are the biggest contributor to India's import bill. Nomura says India's current account deficit is likely to remain elevated reflecting the global new norm of high oil prices and weak exports.
Gold imports: A sharp surge in gold imports in the December quarter of 2012 due to the Diwali festival and ahead of schedule gold imports on expectation of an impending import duty hike contributed to the record deficit, global investment bank Nomura said in a report. India is the largest importer of gold. Gold is its second biggest import item after oil and contributes around 10 per cent to the total import bill.
Weak exports: India's trade deficit, or the excess of imports over exports, stood at $59.6 billion in the December quarter. Overall, in the first nine months of this fiscal, this deficit stands at $150 billion as compared to $138 billion in the year-ago period.
Rupee under pressure: The worse-than-expected reading will keep the rupee under pressure. The rupee was the third worst performing currency in Asia in 2012, even though net inflows into Indian stocks were the highest in the region. It closed 2012 at 55.00 per dollar, having lost 3.3 percent of its value over the year.
Financing the deficit: Robust inbound investments into equities and debt have enabled India to fund the gap. However, the quality of flows is concerning because of lower FDI inflows, which are more stable in nature, and higher debt and other capital inflows, Nomura said.
The worst seems to be over: The current account deficit is likely to improve to around 4.5 per cent of GDP in the January to March quarter, Nomura said.
The government and the Reserve Bank of India will take additional steps whenever warranted to tackle the gap, the finance ministry said. The deficit is likely to moderate in the March quarter if the current trend of improved exports and steady imports persisted, the ministry added. (Read: Montek calls for strategy to deal with high current account deficit)
Economists, who had on average forecast a figure of just over 6 per cent of GDP, also expect the gap to narrow in the current quarter and beyond. That should give some relief to policymakers also struggling to inject momentum into an economy that appears to be growing at its slowest rate in a decade while also trying to stifle inflationary pressures.
(With inputs from Reuters)