Current account deficit likely to be lower at 3% this fiscal, says SBI report

The biggest impact on CAD is oil imports, which form as much as 30% of the country's import bills

State Bank of India has pencilled in a lower current account deficit at 3 per cent for this fiscal as against the minimum consensus of 3.5 per cent, citing rising software exports, remittances and a likely $5-billion jump in forex reserves via swap deals.

Every $10 increase in crude prices impacts the Current Account Deficit (CAD) to the tune of 40 basis points while the same on fuel inflation is 50 bps and also results in a 23 bps decline in growth, according to Soumyakanti Ghosh, the chief economic advisor at SBI.

CAD has a counter-cyclical shock absorber, he said in a report on Thursday.

The exchange rate is a major contributor to software export growth and 40 per cent of its variation is explained by exchange rates. "If we translated these numbers in actual terms, every Re 1 fall against the dollar leads to an increase in software exports by $250 million".

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This, along with an expected $5 billion-forex reserve accrual by way of swap transactions and higher remittances, will cap CAD at 3 per cent of GDP as against the average lowest level projected for the year at 3.5 per cent, Ghosh said.

The strong remittances and software exports have lowered CAD by 60 bps in the June quarter, adding that if this trend continued in the September quarter, then CAD would be below 3.5 per cent in the second quarter and at 3 per cent in the full fiscal. Even otherwise, the chances of it exceeding 3.5 per cent of GDP are minimal, he added.

According to Ghosh, forex reserves, which have declined from $642 billion in September 2021 to just about $531 billion last week, are expected to rise by $5 billion as swap transactions reverse.

The biggest impact on CAD is oil imports, which form as much as 30 per cent of the country's import bills. Therefore, any increase in oil price has a direct impact on the trade deficit by increasing the import bill and consequently widening the CAD.

Software exports have been rising with the share of offsite mode of exports of software services by domestic IT services companies soaring to 88.8 per cent in FY22 from 82.8 per cent five years ago.

Ghosh said that a positive shock to oil prices leads to an immediate and sharp increase in CAD but the same dissipates completely in about eight quarters.

In the case of GDP, a positive fall in oil prices leads to an immediate decline which, however, starts reversing after three quarters and completely dissipates after the seventh quarter.