New Delhi : India’s current account deficit (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, Moody’s and other experts have said.
Rupee last week dropped to a record low of 70.32 to a US dollar as political turmoil in Turkey and concerns about China’s economic health continued to support safe-haven assets and weighed on emerging market currencies.
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 $18.02 billion in July.
“India’s current account deficit is likely to widen to 2.5 per cent in FY 2018-19, 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 US dollar since the beginning of 2018 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.
Japanese financial services major Nomura said current account deficit is expected to widen to 2.8 per cent of the GDP in this financial year.
“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,” it 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”.
Sunil Sinha, Principal Economist, India Ratings and Research, said the rupee depreciation will have both positive and negative impact on the economy.
“On the negative side it will increase the oil import bill leading to higher current account deficit. Also, costly oil import would seep into the economy via higher inflation, make infra and other projects, which have a large import content, expensive and will even make critical imported defence items more expensive,” Sinha said.
On the positive side, he said as an overvalued rupee was hurting export competitiveness, it will improve export competitiveness of Indian goods and services. Also, it will improve the top line/bottom line of the companies especially export oriented IT/IT services companies.
“Net-net it may inflict some pain in the short run, but would lead to gain in the medium to long term,” he said.
