A truck transporting shipping containers drives past stacked containers at a port (Photographer: SeongJoon Cho/Bloomberg)

Current Account Gap Widens On Higher Trade Deficit

India’s current account deficit widened in the fourth quarter of 2017-18 compared to a year ago on account of a higher trade gap.

The current account deficit stood at $13 billion or 1.9 percent of GDP in the January-March 2018 period, showed data released by the Reserve Bank of India today. This is significantly higher than the current account deficit of 0.4 percent of GDP in the fourth quarter of 2016-17, but marginally lower than the gap of 2.1 percent of GDP in the preceding October-December 2017 quarter.

For the financial year, the current account deficit stood at $48.7 billion or 1.9 percent of GDP.

“The size of the current account deficit in Q4FY18 nearly rivaled the full year deficit recorded in FY17, underscoring the impact that rising commodity prices have on the external balances of net importers such as India,” said Aditi Nayar, principal economist at ICRA. The rating agency expects the current account deficit to widen further to about 2.4 percent of GDP in FY19, assuming an average crude oil price of $75 per barrel and an estimated 8 percent rise in net import volumes.

Despite the wider current account deficit, the balance of payments remained positive. India drew in foreign direct investment of $30 billion in FY18, along with portfolio flows of $22 billion. As a result, there was a net accretion of forex reserves to the tune of $43.6 billion on a BoP basis.

The widening current account deficit due to the larger trade gap has become a matter of concern for the currency markets. The Indian rupee has depreciated 5 percent so far this year due to the expectation that the balance of payments would weaken in FY19.

Should the trade gap remain wide and portfolio outflows continue, the possibility of a negative balance of payments in the current year cannot be ruled out, said Nayar.

If crude oil prices resume an uptrend, the negative sentiment related to a rising current account deficit and the possibility of a BOP deficit in FY19, may spur the rupee to intermittently test the previous all-time lows. 
Aditi Nayar, Principal Economist, ICRA