BHUBANESWAR : Rising crude prices, depreciating rupee and lukewarm export growth is expected to push the country’s current account deficit (CAD) higher, adding to borrowing woes of corporates sourcing funds from global markets.
By losing over 9 per cent year-to-date, rupee is the worst performing among the currencies of major emerging markets. An RBI data shows that the CAD has spiked to 1.9 per cent ($48.7 billion) of GDP in 2017-18 from 0.9 per cent a year ago, and the same is projected to scale 2.6 per cent by March on the back of widening trade deficit.
“A widening CAD and weakening rupee, coupled with rising interest rates and forward premium can impinge on the ability of corporates to tap foreign markets to raise debt capital. For instance, annualised forward premium on the three-month rupee-dollar futures contract rose to 4.36 per cent on August 21 from 3.46 per cent on March 31, 2018, reflecting a commensurate rise in hedging costs,” an India Ratings report said on Tuesday. Similarly, higher capital outflows and widening CAD will increase the credit spreads, the India Ratings report warned.
The widening CAD is accompanied by an increase in capital outflows ($5.5 billion so far in FY19) primarily from debt capital markets, the report said. It added that this can further worsen the demand-supply mismatch in debt markets, thereby widening credit spreads over the near to medium term. The pains for the rupee are also not over yet. Externalities resulting in turbulence in emerging market currencies can render the rupee more volatile over the near term. Over the last 16 months, not only have the corporate yield curves been shifting upwards, but also the curvature itself has been transformed, primarily driven by an increase in short-and-intermediate-term yields than in short-and-long-term yields.