CAD set to widen; seen rising to 2.5% of GDP in June quarter: Icra

In the June quarter of FY18, CAD was $ 15 billion, and for the full year of FY18 it stood at 1.9 per cent of the GDP, Icra said in its report

The country's current account deficit (CAD) is set to widen and the first quarter print may come in at $ 16-17 billion or 2.5 per cent of GDP, says an Icra report, adding for the full year the gap may scale a six-year high of $ 67-72 billion.

In the June quarter of FY18, CAD, which is the difference between forex earned and expended, was $ 15 billion, and for the full year of FY18 it stood at 1.9 per cent of the GDP, Icra said in its report on Thursday.

Factoring in an average crude price of $ 75 a barrel in FY19 against $ 56 in FY18 and a 6 per cent rise in net imports, net oil imports are likely to rise to $ 98-100 billion in FY19 from $ 69 billion in FY18.

Given the current commodity prices, we expect merchandise exports and imports to expand by 10 per cent and 13 per cent, respectively, in FY19, widening the merchandise trade deficit to $ 187-192 billion, from $ 160 billion in the last fiscal year.

But services trade surplus and remittances are likely to improve by 6-9 per cent each, thanks to a weaker rupee.

"Both this will have CAD to increase to $ 67-72 billion or 2.5 per cent of GDP in FY19, from $ 48.7 billion or 1.9 per cent in FY18," said Aditi Nayar, principal economist, Icra.
 

The massive spike is attributable to a contraction in net imports of precious metals and stones inadequate to stem the outflow related to higher crude oil prices, she said.

"Annualised rise in CAD is likely to continue for the seventh consecutive quarter in Q1, driven by higher commodity prices and demand for imports of machinery and electronic goods, amid a contraction in exports of readymade garments, gems and jewellery and iron ore," she said.

Following the surge in crude prices, net import bill related to petroleum products soared 50.1 per cent to $ 22.5 billion in Q1 from $ 15 billion.

But merchandise trade deficit related to non-oil, non-precious items rose a moderate 11.9 per cent to $ 15.8 billion from $ 14.2 billion, which was led by a sizeable spike in imports of machinery, iron & steel, coal and electronics. But this was offset by a contraction in exports of readymades and iron ore.

"The impact of this was partly absorbed by a 39.6 per cent decline in imports of gold, silver, pearls, precious and semi-precious stones to $ 6.6 billion from $ 10.9 billion, respectively," she said.

On a positive side, weaker rupee has seen the services trade surplus rises at a healthy 9.7 per cent in the first two months of the quarter relative. But in absolute terms this translates into a moderate $ 1.1 billion rise only.

A weaker rupee and higher crude prices are likely to have supported remittances which would prevent a sharper worsening of the current account deficit, she said.

The widening of the merchandise trade deficit to a 61 -month high $ 16.6 billion in June has fuelled concerns regarding the near-term CAD outlook.

"Unless commodity prices plunge, monthly merchandise trade deficit may average $ 15.5-16 billion over the rest of the fiscal, resulting in a sombre outlook for CAD," she added.

Notwithstanding the recent decline in gold prices, the base-effect led to contraction in gold imports in Q1, but is unlikely to be sustained in the remainder of this fiscal, which would exert further pressure on CAD.