New Delhi: India’s current account deficit is expected to widen to 2.8 per cent of the GDP in this financial year, says a Nomura report.
With rising oil prices, depreciating rupee and outflow of portfolio investments, there are concerns that CAD might rise in the current fiscal.
“Overall, we expect the current account deficit to widen to 2.8 per cent of GDP in FY19 from 1.9 per cent in FY18,” the Japanese financial services major said.
It further said that “balance of payment (BOP) funding to remain a challenge in FY19 as the basic BOP (current account + net FDI) is negative and portfolio flows also remain negative”.
CAD, which is the difference between the inflow and outflow of foreign exchange, jumped to $48.7 billion, or 1.9 per cent of GDP, in 2017-18 fiscal. This was higher than $14.4 billion, or 0.6 per cent, CAD in FY17.
According to official figures India’s trade deficit, or the gap between exports and imports, in July widened to $18 billion, the most in more than five years.
Trade shortfall puts pressure on the current account deficit (CAD), a key vulnerability for the economy.
India’s exports rose by 14.32 per cent to $25.77 billion in July, while imports during the month were valued at $43.79 billion.
According to Nomura, the downside risks to exports remain due to a weaker global growth outlook though currency depreciation could provide some relief to exporters.
On the other hand, import growth, is likely to remain elevated in the near-term due to high oil prices, though weak rupee and domestic slowdown will moderate imports in the coming quarters.
The rupee has been among the worst-performing currencies against the dollar so far this year and settled below the 70-mark for the first time in history on August 16 on strong demand for the US dollar amid ongoing Turkish crisis.
Meanwhile, Moody’s and other experts have said that CAD will widen to 2.5 per cent of the GDP in the current fiscal due to higher oil prices that has been accentuated by rupee depreciation.
Joy Rankothge, Vice-President — senior analyst, Moody’s Investors Service said while the weaker rupee will benefit exports at the margins, it is unlikely to reverse the trade deficit, which hit a five-year high of $8.02 billion in July.
“India’s current account deficit is likely to widen to 2.5 per cent in FY19, up from 1.5 per cent in fiscal 2017 due to higher oil prices and strong non-oil import demand as domestic demand accelerates,” he said. “Net oil imports accounted for 2.6 per cent of GDP in FY 2017-18 and will increase further in fiscal 2019.”
Rajiv Biswas, APAC chief economist, IHS Markit, said the significant depreciation of the rupee against the dollar reflects a number of factors. “A key driver has been gradual US Fed monetary policy tightening, which has resulted in dollar appreciation against many other currencies globally. However, the rupee weakness also reflects India's widening current account deficit as higher world oil prices have pushed up oil import costs,” he said.
