High Commodity Prices To Push CAD To 2.8% Of GDP In 3QFY22: Ind-Ra

India Ratings and Research (Ind-Ra) expects the current account deficit (CAD) to come in at the second-highest level of USD23.6 billion (2.8% of GDP; 13-quarter high) in 3QFY22 as against a deficit of USD9.6 billion (1.3% of GDP) in 2QFY22 (3QFY21: deficit of USD2.2 billion, 0.3% of GDP).

Although the omicron-led COVID wave has subsided, the geopolitical risks to the global recovery have increased due to the Russia-Ukraine conflict. The direct effects of this conflict have pushed the commodity prices (crude oil prices have been on a boil, Brent crude increased to USD131.31/barrel as of 9 March 2022) and freight and transportation costs higher. In addition, the Indian rupee (INR), which averaged INR75 against the dollar in February 2022, is expected to average around INR76 in March 2022 which might result in a depreciation of 0.29% in 4QFY22 over 3QFY22.

Ind-Ra believes that despite the adverse effects of the Russia Ukraine conflict, the merchandise imports are likely to recover further due to the normalising domestic economy, higher commodity prices and depreciation of INR, pushing the merchandise imports bill to over USD166 billion in 4QFY22. The FY22 merchandise import bill is estimated to be an all-time high of over USD606 billion. However, Ind-Ra believes merchandise exports might be constrained to USD101.3 billion in 4QFY22, taking the merchandise exports to USD406 billion in FY22. As a result, the merchandise trade deficit is likely to come at USD200 billion in FY22. All in all, CAD is expected at over USD25 billion in 4QFY22.

Merchandise exports in 3QFY22 grew 41.0% yoy to USD106.8 billion, taking the 9MFY22 level to USD305.1 billion. Exports in January-February 2022 grew 23.8% yoy. To achieve the export target of USD400 billion in FY22, exports will have to attain the level of USD22.61 billion in March 2022 (same period last year: USD35.25 billion). Given the trend so far in this fiscal, the exports appear to be on track to breach the USD400 billion target, despite the heightened geopolitical risk due to the Russia-Ukraine conflict. Russia and Ukraine contribute nearly one-fourth to the global wheat supplies; the conflict thus has brightened the prospects of wheat exports from India.