Current account deficit to remain steady at $16-17 billion in Q1 FY20, says ICRA

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Current account deficit to remain steady at $16-17 billion in Q1 FY20, says ICRA

Decline in crude oil prices, hike in customs duty on gold, the raging US-China trade war, and sluggish domestic demand can lead to a contraction in merchandise exports and imports

ICRA has predicted that the current account deficit (CAD) will remain largely steady for the first quarter of financial year 2019-20. This Moody's-affiliated credit ratings agency stated that the current account deficit in Q1 FY20 will print at $16-17 billion, from $15.8 billion in Q1 FY2019.

ICRA predicted a contraction in India's merchandise exports and imports. The agency also forecasted that India's CAD will widen to $63-68 billion in FY2020, from $57.2 billion in FY2019, while remaining steady at around 2.1 per cent of GDP.

"The widening in the merchandise trade deficit is likely to be absorbed by a mildly higher services trade surplus and remittance flows in Q1 FY2020. As a result, the CAD is expected to remain largely steady at $16-17 billion or 2.3% of GDP in the just-concluded quarter, relative to," said Aditi Nayar, Principal Economist, ICRA.

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ICRA predicted a contraction in both merchandise exports and imports due to a decline in crude oil prices on an annual basis, and the recent hike in custom duties on gold and other precious metals, combined with the raging trade war between the US and China, and sluggish domestic demand.

"The prevailing YoY decline in crude oil prices and a temporary dip in gold imports following the tax changes introduced in the Union Budget, may well result in a contraction in aggregate merchandise imports as well as exports in July 2019. However, both these factors would contribute to a sizeable reduction in the size of the trade deficit in July 2019 to approximately $16-16.5 billion from the $18.6 billion recorded in July 2018, which was the highest monthly print for FY2019," Nayar added.

ICRA said that it expects merchandise exports and imports to grow by a mere 2-3% and 4-5%, respectively, during FY20. Any anticipated decline in the average price of India basket of crude oil, and signs of moderation in domestic consumption and industrial demand is likely to weight down merchandise exports and imports, the agency further said.

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A sustained pick-up in the price of crude oil, which appears to be an unlikely scenario at present, remains a risk to the size of the CAD. According to ICRA, every $1/barrel increase in the average price of crude oil in FY20 is likely to expand the CAD by around $1.6 billion.

The increase in gold prices after the recent custom duty hike is likely to restrict its import. However, a revival in gold imports, closer to the festive season, may push up the size of the CAD to $28-30 billion in H2 FY20, in comparison to the $21.5 billion recorded in H2 FY19, ICRA stated.