Duty Cut Sparks Gold Rush, Q2FY25 CAD May Hit 2%

With a sharp widening in the merchandise trade deficit during July to August FY2025 on a year-on-year (YoY) basis, amid the spike in gold imports, Icra expects the current account deficit (CAD) to widen to 2.0 per cent of gross domestic product (GDP) in Q2FY2025 from 1.3 per cent of GDP in Q2 FY2024, while also exceeding the level seen in Q1FY2025 (-1.1 per cent of GDP).

The value of gold imports eased marginally by 1.9 per cent to USD 9.5 billion in Q1 FY2025, with the sharp 18.2 per cent YoY increase in prices (to USD 2,336/troy ounce) constraining volume growth in the quarter. Thereafter, such imports fell by 10.7 per cent YoY to USD 3.1 billion in July 2024, before surging to a record monthly high of USD 10.1 billion in August 2024 (YoY: +104 per cent) boosted by the sharp cut in the customs duty on gold (to 6.0 per cent from 15.0 per cent) declared in the Union Budget FY2025 as well as pre-festive demand.

Gold prices have surged to a record-high of USD 2,650.9/troy ounce as of 23 September 2024, after the 50 bps rate cut by the US Fed as well as ongoing geopolitical tensions (average of USD 2,395.3/troy ounce in July 2024). The expectations of further rate cuts by the US Fed could push up prices in the remainder of the fiscal, which could impact the demand for gold and restrict the value of gold imports.

While the current monsoon trends augur well for the rural demand for gold, with a lower number of auspicious days in FY2025 (62 days) relative to FY2023 (>80 days) and FY2024 (68 days), there is likely to be higher seasonality in demand in the current fiscal. Overall, Icra estimates gold imports at USD 46 to 49 billion in FY2025 (USD 45.5 billion in FY2024), with the volatility in prices remaining a key monitorable.

Overall, the rating agency projects the CAD to rise sharply to USD 42 to 45 billion in FY2025, even as it is likely to remain manageable at 1.1-1.2 per cent of GDP (-USD 26.0 billion; -0.7 per cent of GDP in FY2024). While the cut in gold customs duty poses an upside to risk to these estimates, its impact is likely to be transient.

India’s current account expectedly reverted to a deficit of USD 9.7 billion (-1.1 USD of GDP; Icra’s expectations: -USD 13.0 billion, -1.4 per cent of GDP) in Q1FY2025 from the transient surplus of USD 4.6 billion (+0.5 per cent of GDP). While it exceeded the year-ago level (-USD 8.9 billion; -1.0 per cent of GDP), it trailed our forecast.

The turnaround to a deficit in Q1FY2025 from a surplus of USD 4.6 billion in Q4 FY2024 was led by a larger merchandise trade deficit (to USD 65.1 billion in Q1 FY2025 from USD 52.0 billion in Q4FY2024) as well as a dip in the services trade surplus (to a four-quarter low of USD 39.7 billion from USD 42.7 billion).

The earnings from invisibles rose by 16.0 per cent YoY to USD 55.4 billion in Q1 FY2025 from USD 47.8 billion in Q1 FY2024. However, this was more than offset by the YoY widening in the merchandise trade deficit, leading to a sharper current account deficit in that quarter, relative to Q1 FY2024, Icra added.

Overall, the reversal to a current account deficit along with the quarter-on-quarter (QoQ) decline in net financial flows in Q1 FY2025, led to a lower accretion of reserve assets amounting to USD 5.2 billion in that quarter (+USD 24.4 billion in Q1 FY2024) as against USD 30.8 billion seen in Q4 FY2024.