Economists raise FY24 CAD view by 10-20 bps on elevated crude prices
Informist, Friday, Sep 29, 2023
By Richard Fargose
MUMBAI – Amid rising crude oil prices and a fall in exports, most economists have raised estimates for the 2023-24 (Apr-Mar) current account deficit by 10-20 basis points. They now see India's current account deficit in the range of 1.4-2.1%.
On Thursday, Reserve Bank of India data showed the country's current account deficit widened to $9.2 bln or 1.1% of GDP in Apr-Jun from a seven-quarter low of $1.3 bln, or 0.2% of GDP, in Jan-Mar, primarily on account of a higher trade deficit, coupled with a lower surplus in net services, and a decline in private transfer receipts.
This month, upward pressure on crude oil prices has risen with supply-side cuts by the Organization of the Petroleum Exporting Countries and allies and stronger-than-expected demand.
Recent data show that India's exports and imports are both contracting. The trade deficit has risen because exports have contracted more than imports.
In August, India's merchandise exports amounted to $34.48 bln, down 6.8% from a year ago. Imports were valued at $58.64 bln, down 5.2% on year. As a result, the merchandise trade deficit widened to a 10-month high of $24.16 bln in August.
Economists said high frequency indicators show that domestic demand remains on a firm footing, supported by urban demand and capital expenditure by the government, while exports contracted, in particular non-oil exports, on weakness in external demand.
This combination could maintain upward pressure on net non-oil and non-gold imports going forward.
Economists see the surge in crude oil prices adding further upward pressure on the trade deficit in the remainder of 2023-24.
"Q2FY24 (Jul-Sep) CAD/GDP is likely to materially worsen and may print more than double that of Q1 (Apr-Jun), with sequentially wider goods deficit led by high oil and core imports," said Madhavi Arora, lead economist at Emkay Global Financial Services Ltd.
The International Energy Agency expects a significant shortfall in supply of crude oil in Oct-Dec with production cuts extended till the end of the year.
Since Sep 1, the price of Brent crude on the Intercontinental Exchange has risen more than 7%, hitting $97.69 per barrel on Thursday, its highest level since November 2022.
"Though the current account deficit in Apr-Jun widened less than we expected, risks to our forecasts have emerged from higher crude oil prices, given India's position as a net energy importer," said Rahul Bajoria, managing director and head of Emerging Markers Asia (ex-China) Economics, Barclays.
Assuming that the Indian crude basket averages $90 per bbl in Oct-Mar, IDFC FIRST Bank expects 2023-24 current account deficit to be around 1.9% of GDP, against the earlier estimate of 1.8%.
"In case crude oil prices average $100 per barrel in H2FY24 (Oct-Mar), then FY24 current account deficit could widen to 2.1% of GDP, which is within sustainable levels," IDFC FIRST Bank economist Gaura Sen Gupta said in a report.
Sen Gupta said global crude oil inventories are uncomfortably low, which is increasing the chances of further upside pressure on prices of the commodity.
Owing to the likely higher current account deficit, the Indian rupee is expected to remain under pressure.
"Though FPI inflows from inclusion in the global bond index are likely to aid the rupee in the medium term, risks from the global side are likely to dominate and keep the rupee under pressure over the near term," Kotak Economics Research said in a note.
Kotak Economics Research also said the RBI's intervention to stem any sharp volatility in the rupee would see the dollar/rupee trading in a narrow range of 82.75-83.50 over the near term, but with weak bias. End