India’s current account deficit (CAD) widened to $15.8 billion, or 2.4% of GDP, in the first quarter of the current financial year, on the back of surging global oil prices, rising non-oil imports and a depreciating rupee. Trade deficit, too, widened to $46 billion, as exports remained broadly flattish at $83.4 billion while imports widened to $129 billion during the quarter.
On a sequential basis, the spike in CAD is because of higher trade deficit amid weaker exports, especially in labour-intensive industries, and greater imports. Non-oil and non-gold imports continue to remain strong, led by commodities and electronic goods. CAD is likely to widen further, given higher oil prices now compared with the Q1FY19 average.
The escalation in global trade protectionism and the rising commodity prices pose upside risks to India’s trade deficit. Widening trade deficit amid heightened global uncertainty is likely to keep the rupee under pressure.
The finance ministry announced a slew of measures aimed at containing CAD. These are primarily aimed at easing conditions related to external commercial borrowings, hedging conditions for infrastructure loans, and loosening restrictions on masala bonds.
These measures could lead to additional capital flows of around $10 billion. In an environment, when the rupee is under pressure, foreign investors would not be much willing to increase its portfolio of rupee denominated assets.