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India’s current account deficit is expected to narrow to below 2.0 percent of the gross domestic product (GDP) in the second half of FY19, taking full year CAD to -2.3 percent, while FY20’s deficit is seen at a manageable 2.1 percent of GDP, according to the latest research report from DBS Economics.
The peak in the deterioration of India’s current account deficit (CAD) is likely behind us. CAD in Q1 FY19 i.e. June 2018 quarter rose from 2.6 percent of GDP to 2.9 percent in Q2 (July-September), marking a peak.
India’s trade balance benefited from tailwinds in second half of FY19, key amongst which was a correction in global oil prices. Brent hit a high of USD85pb in October 2018 but have since swooned; an initial dip was followed by a rebound.
Even at current levels, oil is still ~20 percent below 2018 highs. Monthly oil imports, as a result, moderated from USD14 bin in October 2018 to USD9bn in February 2019 (helped by a firmer rupee), even as the annual oil bill is on course to surge 32% YoY in FY19, building on an 25% increase year before.
Encouragingly, the twelve-month trailing net oil deficit is also beginning to turn down, as the chart highlights. Secondly, gold imports have moderated this year, barring seasonal volatility. High metal prices and a weak rupee, in midst of a benign price outlook, lowered the allure of the asset as an inflation hedge.
Next, non-gold non-oil imports have slowed, primarily due to a decline in key segment of electronics (likely due to high import duties), transport equipment, chemicals etc. In part this also reflects a broader slowdown in growth, as easing consumption and is accompanied by weakening momentum in sectors previously serviced by non-bank funding support, the report added.
"Into FY20, the CAD is likely to stay manageable at -2.1 percent of GDP, as a moderation in exports due to a challenging global environment, is offset by moderate imports owing to lower oil prices and softening demand," DBS Economics further commented.
