India’s Current Account Deficit Expected to Stay Under Control, But Trade Deficit and Rupee Face Challenges
India's current account deficit (CAD) is expected to remain within a manageable range for both FY25 and FY26, according to a recent report by Bank of Baroda. The report suggests that muted oil prices will play a key role in supporting India's external financial position and help manage the CAD in the coming years.
A Current Account Deficit (CAD) occurs when a country’s total imports of goods, services, income, and current transfers exceed the total exports. In simpler terms, it means that a country is spending more on foreign goods, services, and investments than it is earning from its exports and other international inflows. This situation results in borrowing from other countries or using foreign reserves to make up for the difference.
Oil Prices Offer Stability
The report highlights that despite ongoing global market volatility, steady oil prices are expected to ease the pressure on India's import bill, helping to balance trade dynamics. The country's oil import costs are crucial to the overall trade balance, and the current outlook for oil prices appears favorable for India. While there could be modest increases in commodity prices, oil prices are expected to remain a stabilizing factor.
Merchandise Trade Deficit Challenges
However, India's merchandise trade deficit poses a concern. In October 2024, the trade deficit widened to a 13-month high of USD 27.1 billion, driven by a rise in imports of oil and gold. Despite this, India’s export growth remained strong, with non-oil exports rising by 17.3% in October.
For the fiscal year so far, the trade deficit has been higher than last year, mainly due to adjustments in global commodity prices, particularly oil and gold.
Impact of Global Trade and Protectionism
Looking ahead, the report indicated that export growth would largely depend on global trade trends. One potential risk for India’s trade outlook is the rising wave of U.S. protectionism, which could negatively impact India’s exports. Trade barriers could hurt Indian products' competitiveness in the global market, especially as countries like the U.S. implement policies to reduce imports.
Rupee Under Pressure
The report also pointed to ongoing pressure on the Indian rupee (INR). The rupee has weakened recently due to a combination of external factors, including a stronger U.S. dollar and capital outflows from emerging markets. These forces have contributed to a weakening bias for the rupee, which is expected to remain under pressure in the near term.
Current Account Deficit Forecast
Despite these challenges, the report expects India’s CAD to stay at a manageable level, estimated to be between 1.2% to 1.5% of GDP for FY25. This is seen as a level that should not pose significant risks to the Indian economy. However, the continued capital flight from emerging markets could exert further downward pressure on the INR.
Also read: India’s Wholesale Price Inflation Hits Four-Month High in October
SUMMARY
India's current account deficit (CAD) is projected to remain manageable at 1.2% to 1.5% of GDP for both FY25 and FY26, supported by steady oil prices. Despite global market volatility, oil prices are expected to ease the pressure on India's import bill and help balance its trade dynamics. However, India's merchandise trade deficit widened to a 13-month high of USD 27.1 billion in October 2024, driven by increased imports of oil and gold, though exports showed strong growth.
The report also highlights challenges for India's trade outlook, including the risk of U.S. protectionism affecting exports and the ongoing weakness of the Indian rupee (INR). The INR has faced pressure due to external factors like a stronger U.S. dollar and capital outflows from emerging markets. Overall, while India's CAD is expected to remain within a manageable range, the rupee may continue to face downward pressure in the near term.
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