Current account deficit to rise to USD 12-15 bn in Q3FY18: ICRA

ICRA expects a widening of the merchandise trade deficit to bloat the current account deficit to USD 12-15 billion in Q3 FY2018 from USD 8 billion in Q3 FY2017, and USD 7 billion in Q2 FY2018. Subsequently, seasonal factors are expected to contribute to a shrinking of the current account deficit to below USD 5 billion in Q4 FY2018, despite an unfavourable base effect for growth of merchandise exports and ICRA’s baseline forecast that the prices of commodity imports such as crude oil, coal, steel and non-ferrous metals etc. would remain elevated.

Aditi Nayar, Principal Economist, ICRA, said, ”A seasonal decline in gold imports and completion of export orders prior to the quarter-end are likely to soften the merchandise trade deficit in December 2017, relative to the levels of around USD 14 billion each seen in October-November 2017. However, elevated commodity prices would continue to push up the value of imports of items such as crude oil and petroleum products, coal and various chemicals, which suggests that the trade deficit for the ongoing month may persist in double-digits.

”Based on the anticipated widening of the merchandise trade deficit, ICRA expects the current account deficit to record a sizeable deterioration to USD 12-15 billion in Q3 FY2018 or 2.0-2.3% of GDP, from USD 8 billion in Q3 FY2017, and USD 7 billion in Q2 FY2018. Subsequently, we expect seasonal factors to shrink the current account deficit to below USD 5 billion in Q4 FY2018, despite an unfavourable base effect for the growth of merchandise exports, and our forecast that prices of commodity imports such as crude oil, coal, steel and non-ferrous metals, would remain elevated,” Nayar added.

The merchandise trade deficit was steady at a high of ~USD 14.0 billion each in October 2017 and November 2017. This was despite the sharp turnaround recorded by merchandise exports to an expansion of 30.5% in November 2017 from the contraction of 1.1% in October 2017. Moreover, the year-on-year decline in gold imports deepened to 26.0% from 16.0%, respectively. However, the impact of higher exports and lower gold imports was offset by the considerable rise in the pace of growth of non-gold merchandise imports to 26.5% in November 2017, from 10.3% in October 2017.

ICRA expects a push toward completion of the export orders prior to the quarter-end as well as a seasonal decline in gold imports in December 2017, both of which are likely to soften the merchandise trade deficit relative to the levels seen in the previous two months. However, elevated commodity prices suggest that the trade deficit may continue to print in double digits. As a result, the merchandise trade deficit could rise to as much as USD 40 billion in Q3 FY2018. Based on this, ICRA expects the current account deficit to record a considerable deterioration to USD 12-15 billion or 2.0-2.3% of GDP in Q3 FY2018 from USD 8 billion in Q3 FY2017, and USD 7 billion in Q2 FY2018.

Gold imports are likely to ease in Q4 FY2018, relative to Q4 FY2017, which had witnessed a restocking-led spurt. An unfavourable base effect may arrest the pace of growth of merchandise exports in Q4 FY2018 from an expected ~15-16% in Q3 FY2018. Notwithstanding this, and our baseline forecast that the prices of commodity imports such as crude oil, coal, steel and non-ferrous metals, would remain elevated, ICRA expects the current account deficit to shrink to below USD 5 billion in Q4 FY2018, led by seasonal factors.

Overall, ICRA expects merchandise exports to rise by 9-11% to ~USD 305-310 billion and merchandise imports to expand by 14-16% to ~USD 450-455 billion in FY2018, resulting in a widening of the merchandise trade deficit to ~USD 140-145 billion from USD 112 billion in FY2017. The services trade surplus and remittances are likely to improve by 7-8% from the levels recorded in FY2017. Nevertheless, ICRA expects the current account deficit to more-than-double to USD 35-39 billion (~1.5% of GDP) in FY2018 from USD 15 billion in FY2017.
Source: IRIS

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