India’s BoP “risks seem elevated for some time,” says Barclays
The fallout from the war between Russia and Ukraine will keep balance of payments risks for India high for some time, Barclays noted.
“A widening trade deficit has pushed the current account account to its lowest point in nine years, with the deficit now no longer fully offset by capital inflows. With commodity prices rising, India’s trade and current account deficits will continue to grow for some time to come. stay big,” economists at Barclays wrote in a research note to clients.
The increase in the current account balance was mainly due to a sharp deterioration in the trade deficit, which rose to $60.4 billion from $44.4 billion in the third quarter of 21 as imports rose dramatically amid normalization of activity and rising commodity prices.Exports held up well, but this was not enough to offset widening deficits, largely the result of accelerating growth and higher world prices.This dynamic is expected to continue in the first quarter of 22 and second quarter of 22, given the continued improvement in growth and the sharp rise in commodity prices, especially for energy.”
India’s external account – both the current account and the BoP – deteriorated during the December quarter, leading to a surge in crude oil prices and a record pullback by foreign institutional investors.
The current account deficit (CAD) widened to $23 billion or 2.7 percent of gross domestic product (GDP) in the quarter ended December 2021, from $9.9 billion or 1.3 percent of GDP in the previous quarter, according to data released by the Reserve Bank of India (RBI) on Thursday.
That data was from a period before the escalating war between Russia and Ukraine, which has propelled oil prices to decades, with Brent above $100 barrel since Russia invaded Ukraine on Feb. 24.
India’s current account is staring at a significant deficit: the key macro variable set to deteriorate given the conflict between Russia and Ukraine is the current
account deficit, which we now expect to exceed $100 billion in FY22-23, Barclays noted.
“External equilibrium, which had been a major support factor for India over the past two years, has seen its vulnerability to higher oil prices diminish over the years, but the simultaneous rise in the prices of coal, natural gas, edible oils and gold will weigh on the trade deficit,” the research note added.
