CAD set to widen, inflation to remain high: Deloitte report
1 min read 04 Jan 2023, 11:56 PM ISTIndia’s current account deficit widened to a nine-year high of 4.4% of GDP in the second quarter on account of higher trade deficit, reflecting the impact of slowing global demand on exports.
PremiumBENGALURU : India’s current account deficit (CAD) is set to worsen going forward led by higher imports and slower exports, Deloitte warned in a report shared exclusively with Mint.
The report pointed out that the pressure on the rupee is “worrisome" and that India may want to consider restricting imports of non-essential items or scouting for cheaper import sources.
It said inflation will continue to remain high in the near term, compelling the Reserve Bank of India to keep monetary policy tight. That may impact consumption and investment going forward, moderating demand.
“India’s current account is expected to worsen relative to other nations… India is expected to witness a very high CAD. It is the only nation expected to see a sizeable rise in CAD due to higher imports and slower exports… The pressure on rupee is worrisome and India could deal with the situation by restricting imports of non-essentials or looking for alternative cheaper import destinations," said Deloitte in the report. “Keeping an eagle eye on two ‘I’s will be imperative–Inflation and INR."
India’s current account deficit widened to a nine-year high of 4.4% of GDP in the second quarter on account of higher trade deficit, reflecting the impact of slowing global demand on exports.
The country recorded a CAD of 3.3% of GDP in the first half of the current fiscal.
The report added that as the widening CAD could put further pressure on rupee valuation against the US dollar, consequently, foreign exchange reserves may fall further. RBI data shows that in the April-September period, there was a depletion of $25.8 billion in the foreign exchange reserves on a balance of payment (BoP) basis.
The report said that although India’s forex reserves declined from 13 months of import cover at the beginning of 2021 to eight months due to foreign institutional investment outflows, “India is not in a worrisome situation as the country has accumulated sizeable forex reserves over the years (despite having a current account deficit) by importing capital."
The report flagged that inflation will continue to remain high, compelling the RBI to keep the monetary policy tight, which is expected to hurt consumption and investment over the next year, thereby moderating the economic demand.
India’s retail inflation moderated to 5.88% in November, easing below RBI’s upper tolerance limit of 6% for the first time this year.
