Economy

Icra sees CAD doubling to 1.5% of GDP by March

File photo

File photo   | Photo Credit: S. R. Raghunathan

The current account deficit (CAD), which is the difference between inflows and outflows of foreign exchange based on the sale of merchandise, services and remittances, was 1.3% of GDP in September.

Rising commodity prices - especially that of crude oil that has hit a three-year peak last week - will double the current account deficit (CAD) to $39 billion or 1.5% of GDP this fiscal year, warns a report.

In September, domestic rating agency Icra had pegged CAD which is the difference between inflows and outflows of foreign exchange based on the sale of merchandise, services and remittances, at 1.3% of GDP.

The widening merchandise trade deficit will lead to a deterioration in CAD to around between $12 billion and $15 billion. This translates to2% to 2.3% of the GDP in the December quarter, it said.

However, seasonal factors will help the CAD shrink sharply to under $5 billion for the March quarter, settling for a yearly deficit of 1.5% of GDP, at $39 billion.

So far this fiscal, the country has recorded a CAD of 2.4% in the first quarter and 1.2% in Q2.

The CAD,one of the most critical factors that dictates macro stability, stood at $7 billion in the September quarter and $8 billion in the December period last year.

Aditi Nayar, Principal economist, Icra said said that shrinkage in the March quarter will happen despite the unfavourable base effect of exports growth, and elevated expectations on import commodity prices such as crude oil, coal, steel and non-ferrous metals.

Expectations of widening of merchandise trade deficit is largely due to the high prices of commodity imports, the report said, adding that the deficit is expected to be in double- digits for the third straight month in December despite help from rising exports.

The merchandise trade deficit was $14 billion in both October and November 2017.

The agency expects a push towards completion of export orders prior to the quarter-end as well as a seasonal decline in gold imports in December, both of which are likely to soften the merchandise trade deficit relative to the levels seen in the previous two months.

Commenting on the short-term future, where it expects a sharp improvement, Icra said gold imports are likely to ease in Q4, relative to Q4 of FY17, which had witnessed a restocking-led spurt.

Also, an unfavourable base effect may arrest the pace of growth in merchandise exports in Q4 from an expected 15% to 16% in Q3, it said, reiterating that seasonal factors will keep the CAD under $5 billion for Q4.

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Printable version | Jun 3, 2020 12:37:47 PM | https://www.thehindu.com/business/Economy/icra-sees-cad-doubling-to-15-of-gdp-by-march/article22296368.ece

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