The country’s current account deficit (CAD) is likely to widen to a 13-quarter high of USD 23.6 billion or 2.8% of GDP in October-December 2021-22 due to higher commodity prices following the Russia-Ukraine conflict, India Ratings and Research (Ind-Ra) said in a report. The report said although the Omicron-led COVID wave has subsided, the geopolitical risks to the global recovery have increased due to the Russia-Ukraine conflict.
“We expect the CAD to come in at the second-highest level of USD 23.6 billion (2.8% of GDP; 13-quarter high) in Q3 FY22 as against a deficit of USD 9.6 billion (1.3% of GDP) in Q2 FY22,” the agency said.
In Q3 FY21, the deficit was USD 2.2 billion (0.3% of GDP).
The direct effects of the Russia-Ukraine conflict have pushed commodity prices and freight and transportation costs higher; crude oil prices have been on a boil, it said.
In addition, the Indian rupee, which averaged at 75 against the dollar in February 2022, is expected to average around 76 this month which might result in a depreciation of 0.29% in fourth quarter over the previous three-month period, the report said.
The agency said that despite the adverse effects of the Russia-Ukraine conflict, the merchandise imports are likely to recover further due to the normalising domestic economy, higher commodity prices and depreciation of the rupee, pushing the merchandise imports bill to over USD 166 billion in Q4 FY22.
The FY22 merchandise import bill is estimated at an all-time high of over USD 606 billion, it said.
However, the agency believes that merchandise exports might be constrained to USD 101.3 billion in Q4 FY22, taking it to USD 406 billion in FY22.
“As a result, the merchandise trade deficit is likely to come at USD 200 billion in FY22. All in all, CAD is expected at over USD 25 billion in Q4 FY22,” the report said.
To achieve the export target of USD 400 billion in FY22, exports will have to attain the level of USD 22.61 billion in March 2022, the report said.
Given the trend so far in this fiscal year, the exports appear to be on track to breach the USD 400 billion target, despite the heightened geopolitical risk due to the Russia-Ukraine conflict, it added.
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India is heavily dependent on imports to meet its energy requirements. Around 86% of the country’s crude oil requirements are met through imports. So clearly, the country’s import bills are set to surge. The trade deficit will widen putting pressure on the country’s current account balance.