Where is India’s current account deficit headed?2 min read . Updated: 13 Dec 2018, 12:12 PM IST
'Mint' analyses whether India's current account deficit (CAD) will continue to rise and its likely impact on the rupee and capital inflows
New Delhi: India’s current account deficit (CAD) widened to a four-year high of 2.9% of gross domestic product (GDP) in the July-September period, up from 2.4% in April-June this year. Mint analyses whether CAD will continue to rise and its likely impact on the rupee and capital inflows.
Will CAD continue its upward trend?
Most analysts believe that CAD will fall in the third quarter (October-December) as crude oil prices have started softening. With oil prices falling by over 30% since October, India’s external outlook is expected to improve. However, a decision last week by the Organisation of the Petroleum Exporting Countries (Opec) and some non-Opec producers, including Russia, to cut oil production by 1.2 million barrels per day has supported prices this week. That said, with an impending global slowdown and higher oil production in the US, the upside to oil price rise seems to have been capped.
Will assembly election results and the change of guard at RBI impact capital inflows?
Markets appear to have taken both pieces of information in their stride. The stock markets ended slightly higher, while the yields of government securities remained nearly unchanged. The rupee weakened, though at a lower rate than on Monday. The reaction has been quite mature and expectations of a negative impact were not supported. As a corollary, it can be said that markets have brushed aside the developments and it is business as usual. But markets will watch the first few moves of the new RBI governor.
How will a widening CAD impact the rupee?
A higher CAD will put the rupee under pressure and may raise the cost of overseas borrowing. Depleting foreign exchange reserves could raise CAD further.
Why is a high CAD cause for concern?
CAD financing is a worry. CAD will be financed through a mix of foreign direct investment (FDI), portfolio flows and forex reserves management. While FDI flows rose in recent years, a strong dollar and tighter global financial conditions have put more pressure on portfolio investments. The net outflow of portfolio investments in Q2FY19 was $2.4 billion. Based on India’s historical cash flows and capital inflow curbs, global markets might not be able to finance a CAD above 3% of GDP, as per International Monetary Fund.
Where is India’s CAD expected to end up this fiscal?
Once seen near 3% of GDP, most analysts have pared down their CAD forecasts for 2018-19. While ratings agency Icra Ltd now estimates CAD at 2.6% of GDP, Bank of Baroda has projected the figure at 2.5%. The International Monetary Fund said that India’s CAD was expected to widen to 2.6% of GDP in 2018-19. However, at current levels it is much narrower than the near 5% of GDP seen during the taper tantrum in 2013.
Reuters contributed to this story.