Icra sees CAD doubling to 1.5% of GDP by March on rising crude prices

The CAD is one of the most critical factors that dictate macro stability

Rising commodity prices, especially that of crude oil that has hit a three-year peak last week, will double current account deficit (CAD) to $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 exchange based on the 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 $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 $5 billion for the March quarter, it said, adding settling the year at 1.5 per cent of GDP at $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 $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 dictate macro stability, had come at $7 billion in the September quarter and $8 billion in the December period last year.

She said shrinkage in the March quarter will happen despite the 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 the widening of merchandise trade deficit are 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 $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 $5 billion for Q4.