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Current account deficit to narrow to 0.5% of GDP

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India’s current account deficit may narrow to 0.5 per cent of GDP in 2016 from 0.7 per cent in 2015 owing to lower commodity prices, particularly oil, says a report.

“Given lower oil prices, we expect the current account deficit to narrow to 0.5 per cent of GDP in 2016 from 0.7 per cent in 2015, despite weak exports and strengthening domestic demand,” the report by financial services major Nomura said.

The current account deficit, which occurs when the value of imports and investments is larger than value of exports, is expected to narrow to 0.5 per cent of GDP in 2016 largely owing to lower commodity prices, particularly oil.

The report noted that export volumes are likely to remain sluggish on account of weak global demand, while import volumes would rise mainly due to strong domestic demand and real effective exchange rate appreciation.

According to official figures, exports contracted for the 13th month in a row in December 2015, as outward shipments shrank 14.75 per cent to $22.2 billion amid a global demand slowdown.

Imports also plunged 3.88 per cent to $33.9 billion in December over the same month previous year.

However, gold imports shot up which increased the trade deficit to a 4-month high of $11.66 billion as against $9.17 billion recorded in December 2014.

Commenting on the trade data, Nomura said that these mirror the diverging growth trends between domestic demand and external demand.

“We expect export volumes to remain sluggish (weak global demand) but import volumes to rise (stronger domestic demand and real effective exchange rate appreciation),” the report added.

The current account deficit in the July-September quarter of current fiscal rose to $8.2 billion or 1.6 per cent of the GDP from 1.2 per cent or $6.1 billion in the April-June quarter.

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