Ratings agency ICRA has warned that a widening current account deficit could hurt growth
Mumbai:
Ratings agency ICRA has warned of serious risks to the Indian economy in the next financial year (2022-23) due to widening current account (CAD) deficit, falling rupee strong and government bond yields increasingly difficult, due to the continuation of the Russo-Ukrainian War and the resulting sharp increase in the prices of crude oil and other commodities.
International crude oil prices rose to a 14-year high, hitting $130 a barrel on March 7, up from $94 a barrel (the level before Russia invaded Ukraine). Russia is the world’s third-largest oil producer, providing 14% of global production.
The price of a basket of Indian crude oil so far has averaged $114.6 per barrel in March, a sharp increase of 22.9% from $93.3 per barrel in February.
At current crude oil levels, the current account deficit is likely to grow by $14-15 billion (0.4% of GDP) for each $10/bbl average price increase. ICRA chief economist Aditi Nayar said that if prices averaged $130 a barrel in 2022-23, the CAD would grow to 3.2% of GDP, surpassing 3% for the first time in a decade.
So, if the ongoing war pushes the average price of the basket of Indian crude oil in 2022-23 to $115 per barrel, the CAD is predicted to rise to $100-105 billion or 2.8% of GDP. .
The highest CAD was in 2012-13 when it crossed 4.8 percentage points and the second highest was in 2011-12 when it was at 4.3%.
While higher commodity prices and pessimism in global markets should lead to a bearish bias in the rupee, the rupee fell to a lifetime low of 77.01 on Monday, the forecast Large foreign exchange reserves of $631.5 billion as of February 25, the equivalent of 12.6 months of imports, are likely to prevent a sudden drop in prices, she said.
The agency expects the rupee to trade between $76-79 until the conflict subsides and 10-year government securities (G-seconds) yields will rise to 7-7.4 % in the first half of 2022-23.
Higher commodity prices and a weaker rupee pose upside risks to core inflation. 22.
On the growth front, Ms. Nayar sees a major downside risk to the 2022-23 growth forecast of 8% due to higher commodity prices to compress profit margins if the conflict persists.
