CAD: Expect higher CAD in the coming quarters

India’s external sector support which India enjoyed in the last two years is set to diminish. Record trade deficit in April-May of $43.7 billion coupled with soaring oil and commodity prices are expected to push India’s current account in deep deficit in the coming quarters.

FY’22 current account balance which are expected to be released by the end of the month. The current deficit by ratings firm India Ratings is estimated at a three-Year High of 1.38% from 0.9 percent of GDP in FY’21 as demand picked up due to economic revival and global prices started rising putting a pressure on import bill. But economists expect the current account deficit for FY’23 to grow at almost double the pace between 3 to 3.5 percent of GDP.

It is just not oil, but other commodities and raw material imports add to the current risks this year which has already accentuated due the Russia-Ukraine war. ” Even as vulnerability to higher oil prices has declined over the years, the simultaneous rise in prices of coal, natural gas, edible oils, and gold will weigh on the trade deficit” said Rahul Bajoria chief India economist at Barclays Capital.

Q1’2022-23 exports are estimated at $112.5 billion, while imports are pegged at $ 182.9 billion by India Ratings. This translated into a trade deficit $70.4 billion for April- June’2022-23 quarter, almost 70 percent higher than $41.7 billion trade deficit in the same period of FY’22.

Besides crude, India is also dependent on imports of other energy inputs like coal, whose prices are also rising. ” With both prices and volumes of coal imports set to rise this year, we expect an additional burden of 0.3% of GDP from higher coal imports,” said Aurodeep Nandi, India economist at Nomura. ” This adds upside risks to our current account deficit projection of 3.5% of GDP in FY23, up from 1.4% in FY22″

The external sector is expected to face significant uncertainties due to the geopolitical conflicts, resultant supply-chain disruptions and elevated global commodity prices, rapid monetary policy normalization in developed markets and intermittent Covid-led restrictions in key economies. “While gradual easing of restrictions in China should ease some logistics disruptions-led price pressures, demand improvement could restrict significant price corrections” said Upasna Bharadwaj, chief economist at

.” We maintain our FY’2023 CAD/GDP estimate at 3% compared to 1.5% in FY2022. Consequently, we also expect the BOP to shift to a large deficit given substantial widening of trade deficit, and lower net capital inflows due to preference for safe haven assets amid geopolitical tensions and a rapid pace of monetary policy normalization”.

But the Reserve Bank seems confident of handling higher deficit without much disruptions. ” Optimism on exports of both goods and services and remittances should help contain the current account deficit at a sustainable level, which can be financed by normal capital flows” said RBI governor Shaktikanta Das in his statement on Wednesday. “As on June 3, 2022, India’s foreign exchange reserves were of the order of $ 601.1 billion, which are further supplemented by a healthy level of net forward assets of the RBI’.