Indian economy and the threat to the current account deficit
The overall balance of payments may also slip into a deficit this fiscal, as capital inflows may be insufficient to cover the current account deficit
The chart, sourced from a 20 April report from Kotak Economic Research, shows that India’s current account deficit in the current fiscal year is forecast to be the highest in six years.
The report projects three scenarios, with Brent crude prices at an average of $65, $70 and $75 per barrel. Even under the $65 a barrel scenario, the current account deficit is likely to be 2.4% of GDP, higher than in 2013-14.
Moreover, the overall balance of payments is also projected to slip into a deficit this fiscal, as capital inflows may be insufficient to cover the current account deficit. The rupee is therefore expected to weaken. “Additionally, worsening external and domestic macro scenarios amid a heavy election cycle could be a double whammy for INR. We expect USD-INR to range 65-67.5 in FY2019 but don’t rule out it overshooting the historical highs of 68.89 if both domestic and global risks play out,” the report says.
Note that the current account deficit was lower in 2013-14, despite Brent crude prices being much higher then. This is due to stagnation in exports and much higher imports.