State Bank of India’s (SBI) research report Ecowrap has stated that India’s current account deficit (CAD) is likely to touch 2.8% of the Gross Domestic Product (GDP) in the current fiscal (FY19) on account of surge in crude oil prices and moderate growth in exports. It also said that even merchandise trade imbalance is expected to increase to Rs 188 billion in FY19 as against Rs 160 billion in FY18. It indicated that India’s trade deficit, or the gap between exports and imports, in July 2018 widened to $18 billion, the most in more than five years, on the back of tepid export performance amidst higher import bill.
Oil imports registered an annual growth of 57.4% to Rs 12.4 billion, from Rs 7.8 billion in July 2017, and the report attributed the rise in the import bill to increase in oil price and rise in quantity of oil imported. Had the oil price remained the same as in 2017, it estimated that crude oil import bill would have been 31.7% lower in the first quarter of FY19. It also noted that whereas if the volume of crude oil import had remained the same as in previous year, crude import bill would have been 5.5% lower, thereby showing that price effect reigns supreme.
According to the report, the huge increase in trade deficit is more linked to the average export performance so far in FY19. It noted that the CAD is still expected to be majorly financed by non-debt creating (FDI and FPI) capital inflows, which constitute around 44% of the total capital flows. It said that the debt creating inflows which increased in the last fiscal year are expected to remain on the higher side this year as well, which will imply pressures on rupee in case there is a sudden reversal of capital flows.