UBS: India’s current account deficit may worsen in FY19

We continue to see fiscal slippages, global firm UBS estimates that India’s current account deficit will continue to widen in FY19.

We continue to see fiscal slippages, global firm UBS estimates that India’s current account deficit will continue to widen in FY19. In its latest report, UBS says that India’s CAD (Current Account Deficit) doubled from 0.7% of GDP in FY17 to 1.4% of GDP in FY18. “ We expect this deterioration in CAD to be sustained in FY19, albeit at a slower pace than last year. We forecast CAD at 1.8% of GDP in FY19,” Tanvee Gupta Jain, Economist, UBS Investment Bank said in the report. We take a closer look at what UBS has to say about the deteriorating CAD.

CAD to worsen on rising crude oil prices

Explaining reasons for the sustained deterioration in current account deficit, UBS said that higher global commodity prices (especially oil) and rising non-oil non-gold imports on improved demand momentum will continue to weigh on India’s fiscal position. However, the firm reiterates that CAD is not widening at alarming levels. “Based on our analysis, the threshold CAD level for India is around 2.2-2.4% of GDP, assuming potential GDP growth of 7-8%, with real annual import growth following its trend of the recent past, along with net external liabilities and foreign exchange reserves as a ratio of nominal GDP remaining largely steady,” UBS noted adding that a similar study done by the Reserve Bank of India (RBI) estimated India’s sustainable CAD to be around 2.4-2.8%.

USD/INR will remain range-bound

Noting that the domestic currency has underperformed other emerging market (EM) currencies and is down 2% against the US Dollar since January-18, UBS says that based on global/local macro, as well as analysis of India’s external vulnerability, the Indian Rupee is expected to remain range-bound between 63-67 over the next few months. “We estimate the rupee at 64 by end-FY19 and 65.5 by end-FY20. Even as we believe there is depreciation pressure on INR on rising external risks, it should be more than offset due to a weak USD,” UBS noted.

India’s robust forex reserves

UBS says that even though India’s external position remains vulnerable, the risks have fallen over the past five years (since the US tapering episode) on policy measures and creation of external buffers. In its report, UBS notes that India’s FX reserves increased to an all-time high of $422 billion as of January 2018. “They seem in reasonable shape, based on a reserve adequacy metric, to withstand volatility due to global risk aversion,” the firm said.

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