CAD to widen to 2.5% of GDP, say experts

India’s current account deficit (CAD) will widen to 2.5% 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 $18.02 billion in July.

“India’s current account deficit is likely to widen to 2.5% in FY 2018-19, up from 1.5% 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% 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.

“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.

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.