Another worry for Indian economy: Widening current account deficit; two usual suspects at play

By: |
August 20, 2018 10:39 AM

In July, India's merchandise trade deficit, the gap between exports and imports, widened further at $18 billion, which is highest in more than five years, putting further pressure on CAD.

Representative Image: Reuters

India’s current account deficit (CAD) is expected to expand to 2.8% of the GDP in the current financial year from 1.9% in the last financial year, and might rise further, on account of the steep fall in rupee against US dollar, outflow of portfolio investments and increasing fuel prices, according to a report by Japanese financial services major Nomura. CAD is the difference between the inflow and outflow of foreign exchange and a key vulnerability for the economy.

In July, India’s merchandise trade deficit, the gap between exports and imports, widened to $18 billion, which is highest in more than five years, putting further pressure on CAD. Trade deficit rose on the back of an increased net oil import bill and an almost 41% jump in gold purchases from overseas after a contraction in the previous six months. In June, the trade deficit stood at $16.6 billion, recording 61-month peak, on back of surge in net oil import bill according to official figures.

“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,” Nomura noted.

Besides, exports came down to $25.77 billion in the month of July as against $27.70 billion in previous month. Moreover, imports during the month were recorded at $43.79 billion.

According to Nomura, the downside risks to exports remain due to a weaker global growth outlook. However, currency depreciation is expected to provide some relief to exporters. It further added that in near term, import growth may continue to be on higher side, on account of high oil prices. But, weak rupee and domestic slowdown will help in moderating imports in coming quarters.

The Indian rupee broke the 70 per US dollar mark after opening marginally higher on Tuesday last week, on the back of the Turkish economic crisis following which a meltdown was observed in most of the Asian currencies, and then fell further to a record low of 70.32 against the US dollar in opening deals on Thursday.

The Indian currency 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.

Do you know What is Cash Reserve Ratio (CRR), Finance Bill, Fiscal Policy in India, Expenditure Budget, Customs Duty? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Govt to decide on subsidised cooking gas by BPCL before financial bid stage
2Govt examining next version of PMKVY: RK Singh
3India’s external debt up nearly 3% to $559 billion at March-end