Rising commodity prices, especially that of crude oil that has hit a three-year peak last week, will double current account deficit (CAD) to USD 39 billion or 1.5 per cent of GDP this fiscal year, warns a report.
Rising commodity prices, especially that of crude oil that has hit a three-year peak last week, will double current account deficit (CAD) to USD 39 billion or 1.5 per cent of GDP this fiscal year, warns a report. In September, domestic rating agency Icra had pegged CAD which is the difference between inflows and outflows of foreign exchnage based on sale of merchandise, services and remittances, to print at 1.3 per cent of GDP. The widening merchandise trade deficit will lead to a deterioration in CAD to USD 12-15 billion or 2-2.3 per cent of GDP in the December quarter, it said.
However, seasonal factors will help CAD shrink sharply to under USD 5 billion for the March quarter, it said, adding settling the year at 1.5 per cent of GDP at USD 39 billion. So far this fiscal, the country has recorded a CAD of 2.4 per cent in the first quarter and 1.2 per cent in Q2. “Based on the anticipated widening of the merchandise trade deficit, we expect the current account gap to record a sizeable deterioration to USD 12-15 billion in Q3 or 2-2.3 per cent of GDP,” its principal economist Aditi Nayar said.
The CAD,one of the most critical factors that dictates macro stability, had come at USD 7 billion in the September quarter and USD 8 billion in the December period last year. She said shrinkage in the March quarter will happen despite unfavourable base effect of exports growth, and expectations of import commodity prices such as crude oil, coal, steel and non-ferrous metals, to remain elevated.Expectations of widening of merchandise trade deficit is largely due to the high prices of commodity imports, it said, adding the deficit is expected to be in the double- digits for the third straight month in December despite help from rising exports. The merchandise trade deficit came at USD 14 billion each for October and November 2017.
The agency expects a push towards completion of export orders prior to the quarter-end as well as a seasonal decline in gold imports in December, both of which are likely to soften the merchandise trade deficit relative to the levels seen in the previous two months. Commenting on the short-term future, where it expects a sharp improvement, Icra said gold imports are likely to ease in Q4, relative to Q4 of FY17, which had witnessed a restocking-led spurt. Also, an unfavourable base effect may arrest the pace of growth in merchandise exports in Q4 from an expected 15-16 per cent in Q3, it said, reiterating that seasonal factors will keep CAD under USD 5 billion for Q4.