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20 Aug 2018
 |
| India’s current account deficit (The Total Investment & Insurance
Solutions) |
India’s current account deficit (CAD) will
widen to 2.5 per cent of the GDP in the current fiscal due to higher oil prices
that has been accentuated by rupee depreciation, Moody’s and other experts have
said.
Rupee last week dropped to a record low of
70.32 to a US dollar as political turmoil in Turkey and concerns about China’s
economic health continued to support safe-haven assets and weighed on emerging
market currencies.
Joy Rankothge, Vice President – Senior
Analyst, Moody’s Investors Service said while the weaker rupee will benefit
exports at the margins, it is unlikely to reverse the trade deficit, which hit
a five year high of USD 18.02 billion in July.
“India’s current account deficit is likely to
widen to 2.5 per cent in FY 2018-19, up from 1.5 per cent in fiscal 2017 due to
higher oil prices and strong non-oil import demand as domestic demand
accelerates,” he said. “Net oil imports accounted for 2.6 per cent of GDP in FY
2017-18 and will increase further in fiscal 2019.”
Rajiv Biswas, APAC Chief Economist, IHS
Markit, said the significant depreciation of the rupee against the US dollar
since the beginning of 2018 reflects a number of factors. The Total Investment & Insurance
Solutions
“A key driver has been gradual US Fed
monetary policy tightening, which has resulted in USD appreciation against many
other currencies globally. However, the rupee weakness also reflects India’s
widening current account deficit as higher world oil prices have pushed up oil
import costs.
“A further negative for the INR is that a
number of economic crises in large emerging markets including Argentina,
Venezuela and Turkey, have made global investors more cautious about emerging
markets currencies and equities,” he said. The Total Investment & Insurance Solutions
Sunil Sinha, Principal Economist, India
Ratings and Research, said the rupee depreciation will have both positive and
negative impact on the economy.
“On the negative side it will increase the
oil import bill leading to higher current account deficit. Also, costly oil
import would seep into the economy via higher inflation, make infra and other
projects, which have a large import content, expensive and will even make
critical imported defence items more expensive,” Sinha said. The Total Investment & Insurance
Solutions
On the positive side, he said as an
overvalued rupee was hurting export competitiveness, it will improve export
competitiveness of Indian goods and services. Also, it will improve the top
line/bottom line of the companies especially export oriented IT/IT services
companies.
“Net-net it may inflict some pain in the
short run, but would lead to gain in the medium to long term,” he said. The Total Investment & Insurance
Solutions
Rankothge said Moody’s expect the ongoing cyclical
recovery in growth to continue with GDP growth averaging around 7.4 per cent
this year and next driven by the underlying growth momentum in the economy,
pre-election spending and a pickup in rural demand to largely offset the
impacts of a weaker rupee and rising oil prices. The Total Investment & Insurance
Solutions
“From a sovereign risk perspective, low
foreign currency debt and long average debt maturity minimize exposures to
rising rates and currency weakness,” he said. The Total Investment & Insurance
Solutions
Sinha said trade position may worsen in the
short term because of the oil/other items import bill rising immediately, while
the benefit of export competitiveness benefiting the economy largely in the
medium to long term.
“CAD to come under pressure this fiscal.
India Ratings expects CAD to touch 2.6 per cent of GDP in FY19,” he said. The Total Investment & Insurance
Solutions
Biswas said rupee depreciation is not
occurring in isolation, as many other emerging markets currencies have also
shown significant depreciation against the USD this year, including the Chinese
yuan, Indonesian rupiah and Malaysian ringgit. The Total Investment & Insurance
Solutions
“The Turkish lira has crashed by 40 per cent
against the USD since the beginning of 2018, as that nation is engulfed by a
financial crisis. Therefore, India’s relative competitiveness against many
emerging markets competitors has not improved that much despite the rupee
depreciation against the USD,” he said.
Biswas said a further widening of the CAD is
expected in 2018-19 to around 2.4 per cent of GDP, due to a further increase in
the oil import bill and the impact of rupee depreciation on import costs.The Total Investment & Insurance
Solutions
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