Widening Current Account Deficit Could Impact Growth In 2022-23: ICRA

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). Russia is 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, ICRA chief 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 wholesale inflation 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.