Falling gold prices to bring down current account deficit, net positive for India: BofA-ML

NEW DELHI: A fall in international gold prices will help bring down India's current account deficit, says Bank of America Merrill Lynch ( BofA-ML) in its report 'Is the Gold crash Goldilocks?'. Falling gold prices are net positive for India, the report says.

According to BofA-ML, a $100/oz fall will compress the deficit by about $3 billion. "If gold settles at current levels, our FY14 current account deficit forecast will come off 40 bps to 3.9 per cent of GDP from 4.3 per cent of GDP," the bank says.

Gold investment demand is unlikely to revive in a hurry after the recent crash, the bank says. "With rural incomes slowing, we do not expect rural gold demand, another major source of rural demand, to rise substantially this year either," it adds.

Indranil Sengupta, India Economist at BofA-ML, sees a 1 per cent slowdown in consumption owing to the drop in gold prices. However, this will be partially mitigated by the stimulus from a parallel drop in lending rates on lower twin deficits, he adds.

Sengupta says that the saving grace will be that the bulk of gold is stored in bank lockers. "Pure investors in gold tend to belong to the relatively wealthier sections of society, he opines. The bank's commodity strategists forecast gold at $1670/oz in 2013, same as 2012.

Stating that gold prices are unlikely to have seen their lowest point this year, BofA-ML in another report on the precious metal has suggested that gold may fall another $150/oz to $1,200/oz before prices stabilise.

Meanwhile, oil price have also been under pressure. "A combination of seasonal and cyclical headwinds, including a drop in China’s energy demand and a sharp contraction in European credit supply have caused Brent prices to come down roughly $20/bbl since early-February," the bank says in a separate report.

"Strategists Francisco Blanch and Sabine Schels think Brent oil prices could fall below $95/bbl in the near-term should upcoming macro data imply another stall in the patchy global economic recovery," it adds.