A weak rupee and elevated fuel prices will keep India’s current account deficit (CAD) under pressure with analysts seeing it at about 3% of GDP in FY23 compared to 1.2% in FY22 even as these will exert pressure on government finances. Subsidy expenditure is seen to rise to levels significantly higher than projected. Higher oil import bill on account of weak rupee will straddle several sectors, including fertilisers and metals, and also result in lower dividend receipts from state-run fuel retailers whose margins will be hit. Rupee hit a record low of 80 against US dollar for the first time in intra-day trade, before closing at 79.95.
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“The CAD is one of the causes of the rupee to slide on the side of fundamentals as a wider CAD which is not matched by capital flows (FPI inflows are negative) does lead to the rupee falling. We expect CAD to reach 3% of GDP this year,” said Madan Sabnavis, chief economist, Bank of Baroda. India, being a net commodity importer, is getting affected by high commodity prices and a weak currency. Although commodity prices have come off from the recent highs, weak currency continues to have its impact on Indian economy. India Ratings chief economist DK Pant also expects current account deficit to be about 3% of GDP in FY23. “The non-tax revenue (dividend by public sector OMCs) is likely to be affected. However, if the fuel prices don’t correct in the rest of the year, fiscal arithmetic could be impacted much, Pant said.
India’s trade deficit was at a record in May and June ($25 billion/month), driven by record imports ($63 billion/month). Imports (ex oil & gold) were over 30% on-year for past five months. Exports are also near record, but growth is lower. “At $110/bbl crude, estimating FY23 CAD at 3.5% of GDP, though every $10/bbl decline will bring this down by 0.3-0.4 ppt,” according to Jefferies Equity Research. It said rupee could hit Rs 81-82/USD by end FY23, assuming crude stays flattish.
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