Rating agency ICRA has cautioned that widening current account deficit could impact growth


Rating agency ICRA has cautioned about serious risks to the Indian economy in the next financial year (2022-23) due to the widening current account deficit (CAD),steep fall in the rupee and a hardening yields on government bonds, due to the ongoing Russia-Ukraine war and the resultant surge in crude oil and other commodity prices.

International crude oil prices had surged to a 14-year high touching $130 a barrel on March 7, up from $94 a barrel (the level it was at before the invasion of Ukraine by Russia). Russiais the world’s third-largest oil producer, supplying 14 per cent of global production.

The price of the Indian crude oil basket has averaged $114.6 a barrel so far in March, a steep 22.9 per cent surge from $93.3 a barrel in February.

At the current crude level, the current account deficit is likely to widen by $14-15 billion (0.4 per cent of GDP) for every $10 per barrel rise in the average price. If the price averages $130 a barrel in 2022-23, then the CAD will widen to 3.2 per cent of GDP, crossing 3 per cent for the first time in a decade, ICRAchief economist Aditi Nayar said in a report on Tuesday.

So, if the ongoing war pushes up the average price of the Indian crude oil basket in 2022-23 to $115 a barrel, the CAD is projected to widen to $100-105 billion or 2.8 per cent of GDP.

The highest CAD was in 2012-13 when it crossed the 4.8 percentage points and the second high was in 2011-12 when it was at 4.3 per cent.

While elevated commodity prices and pessimistic sentiments in global markets will impart a depreciating bias to the rupee, which fell to its lifetime low of 77.01 on Monday, large forex reserves of $631.5 billion as of February 25, which is equivalent to 12.6 months of imports, are likely to avert a sudden sharp depreciation, she said.

The agency expects the rupee to trade in a range of 76-79 to a dollar until the conflict subsides and 10-year government securities (G-sec) yield to jump to 7-7.4 per cent in the first half of 2022-23.

Higher commodity prices and a weaker rupee pose upside risks to the baseline inflation forecast that the base effect will moderate the average retail and wholesaleinflation to 5 per cent each in 2022-23 from 5.4 per cent and 12 per cent, respectively, in 2021-22.

On the growth front, Ms Nayar sees large downside risks to the 2022-23 growth forecast of 8 per cent as higher commodity prices to compress margins if the conflict lingers on.