NEW DELHI: India’s current account deficit (CAD) will widen to 2.5 per cent of the GDP in the financial year 2018-19, on account of higher crude oil prices, coupled with rupee depreciation, international rating agency Moody’s has said.
“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 2017 fiscal due to higher oil prices and strong non-oil import demand as domestic demand accelerates,” said Joy Rankothge, vice-president and senior analyst, Moody’s Investors Service.“Net oil imports accounted for 2.6 per cent of GDP in FY 2017-18 and will increase further in fiscal 2019,” he added.
Rupee last week dropped to a record low of 70.32 against US dollar, as a landslide effect from Turkish lira crisis and concerns regarding China’s economic health continued to weigh on emerging market currencies.
While the weaker rupee will benefit exports at the margins, it may not reverse the trade deficit, which was at a five-year high of $18.02 billion in July, Rankothge said. Other analysts have echoed the opinion. Rajiv Biswas, APAC Chief Economist, IHS Markit, said that rupee’s significant depreciation against the US dollar since the beginning of 2018 reflects a number of factors.
“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 CAD 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 market currencies and equities,” Biswas said.
Both the sides
While rupee fall could inflate oil import bill, it could improve export competitiveness of Indian goods and services too, said Sunil Sinha, principal economist, India Ratings and Research.