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

Bank chief economic adviser cites rising software exports, remittances and a likely $5-billion jump in forex reserves via swap deals

State Bank of India has pencilled in lower current account deficit at 3% for this fiscal as against the minimum consensus of 3.5%, 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 23 bps decline in growth, according to Soumyakanti Ghosh, Group Chief Economic Adviser at SBI.

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

Exchange rate is the major contributor to software exports growth. "If we translated these numbers in actual terms, every ₹1 fall against the dollar leads to an increase in software exports by $250 million".

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

Strong remittances and software exports had lowered CAD by 60 basis points (bps) in the June quarter, adding that if this trends continued in the September quarter, then CAD would be below 3.5% in the second quarter and at 3% in the full fiscal. Even otherwise, the chances of it exceeding 3.5% of GDP are minimal, he added.

According to Mr. Ghosh, forex reserves, which have declined from $642 billion in September 2021 to 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% 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% in FY22 from 82.8% five years ago.

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

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