Surging crude may take Current Account Deficit past 2% of GDP: Economists

Current Account Deficit for the June quarter may have been benign, but that is likely to change dramatically in the rest of the fiscal year with little signs of Crude oil prices easing and shrinking exports. Economists now expect the second half CAD to go past 2 percent from June levels.

Current account deficit for the June quarter ended lower than consensus at 1.1 percent of GDP according to the latest RBI numbers, almost half of 2.1 percent of GDP in the same period a year ago , though picked up sequentially led largely by contraction in trade deficit during the period.

Crude prices play a major role in determining the CAD accounting for over a fourth of India's import basket. With prices of Russian crude which accounts for over 30 percent of India's crude imports- rising since August, CAD in the rest of the year could rise further. The Russian cruse has touched $80 a barrel from an implied price of $ 66 a barrel during the June quarter. In September the upward pressure on crude oil prices has risen with supply-side cuts by OPEC and demand for crude stronger than expected.



A $10 per barrel increase in oil prices worsens India’s current account position by nearly $10-12bn or 30-32bps of GDP according to Barclays Research. Looking ahead, the CAD is likely to increase in the second quarter to 2.2% - 2.4% of GDP according to estimates by HDFC Bank.

The surge in crude oil prices is expected to add further upward pressure on trade deficit in the remainder of FY24. " In case crude oil prices average at $100 per barrel in the second half of Fiscal 2023-24, then the full year current account deficit could widen to 2.1% of GDP, which is within sustainable levels" said Gaura Sengupta, India economist at IDFC Bank.

Additionally there could also be pressure on non-oil imports. The rise in trade deficit over the last few months has been led by net non-oil non-gold imports, reflecting relatively strong domestic demand compared to external demand. High frequency indicators show that domestic demand remains on a firm footing, supported by urban demand and capex expenditure by the government. While exports have weakened in particular non-oil exports, due to weakness in external demand. " This combination could maintain upward pressure on net non-oil non-gold imports going forward" said Sengupta.

With the average merchandise trade deficit trending higher in Jul-Aug 2023 relative to June quarter levels and the recent rise in crude oil prices, Ratings firm Icra estimates the CAD to widen sequentially to $19-21 billion or 2.3% of GDP in the September quarter. " Overall, ICRA projects the CAD to widen to $73-75 billion (-2.1% of GDP) in FY2024 from $67.0 billion (-2.0% of GDP) in FY2023, building in an average crude oil price of $90/bbl in H2 FY2024" said Aditi Nayar, chief economist, head - research & outreach, Icra Ltd.