The fallout from the Russia-Ukraine war will keep the balance of payment (BoP) risks for India appear elevated for some time, noted Barclays.
“A larger trade deficit has pushed the current account to a nine-year low, with the deficit now no longer being offset completely by capital inflows. With rising commodity prices, India’s trade deficit and current account deficit are set to remain large for some time,” wrote economists at Barclays in a research note to clients.
“The widening in the current account balance was primarily due to a sharp deterioration in the trade deficit, which widened to $60.4bn from $44.4bn in Q3 21, as imports rose dramatically amid a normalisation of activity and rising commodity prices. Exports continued to hold up well, but this was not enough to offset the deficit widening, which largely reflected improving growth and higher global prices. This dynamic is set to persist in Q1 22 and Q2 22 given the ongoing improvement in growth and surge in commodity prices, especially for energy.”
India’s external account – both the current account and the BoP – deteriorated during the December quarter to a surge in crude oil prices and a record pullout by foreign institutional investors.
Indeed, the current account deficit (CAD) zoomed to $23 billion or 2.7 per cent of gross domestic product (GDP) in the quarter ended December 2021 from $9.9 billion or 1.3 per cent of GDP in the prior quarter, according to data released by the Reserve Bank of India (RBI) on Thursday.
That data was for a period before the escalating Russia-Ukraine war, which has pushed oil prices to multi-decade highs, with Brent above $100 barrel since Russia invaded Ukraine on February 24.
“India’s current account staring at a significant deficit: The primary macro variable set to deteriorate given the Russia-Ukraine conflict is the current
account deficit, which we now expect to exceed $100bn in FY22-23, noted Barclays.
“The external balance, which had been a major factor of support for India for the past two years, has seen its vulnerability to higher oil prices decline over the years, but the simultaneous rise in prices of coal, natural gas, edible oils, and gold will weigh on the trade deficit,” added the research note.