India’s trade deficit likely to remain high, current account deficit widening: Nomura

“The surge in oil prices will increase India’s import bill, helped by broader increases in commodities and fertilizers and expectations that gold imports will remain high,” the report said.

“The surge in oil prices will increase India’s import bill, helped by broader increases in commodities and fertilizers and expectations that gold imports will remain high,” the report said.

India’s trade deficit, which shot back up to $21.2 billion in February, is expected to remain high in the coming months and the current account deficit could widen to 2.6% of GDP in 2020, from 1.7% this year 2022-23, Nomura said in a report on March 3.

“The surge in oil prices amid a pick-up in domestic demand will significantly increase India’s import bill, supported by broader increases in commodities and fertilizers and expectations that gold imports will remain elevated as investors seek to hedge against market volatility and inflation. “, says the report.

The situation is “particularly exacerbated by the ongoing Russia-Ukraine conflict,” noted Nomura economists Sonal Varma and Aurodeep Nandi, adding that there are “minor downside risks to exports due to weaker demand from Russia and possibly global spillover effects”.

“Oil drove much of the widening trade deficit in February [as] Imports rose nearly 43% mom after a 31% drop in January, while core imports (non-oil, gold and gems and jewelry) rose just 1.9% (after flat in January)” , according to the report .

“We expect the current account deficit to widen from 1.7% of GDP in 2021-22 to 2.6% of GDP in 2022-23, assuming oil prices average $86.6 per barrel amount; So if oil prices hold up at the current elevated levels, risks will be skewed towards a much larger deficit,” the report said.

Brent crude prices had touched $120 a barrel by Thursday. The Union budget for 2022-23 assumed an average oil price of $75 per barrel. The trade deficit had narrowed to $17.9 billion in January after hitting a record high of $22.9 billion in November 2021 and averaging $21.7 billion between September and December.

A 10% rise in global crude oil prices would widen India’s current account deficit by 0.3% of GDP, economists at Nomura estimated. “Given the lag between spot oil prices and the signing of new oil deals, we should see the full impact of the current surge in oil prices in the April/May trade data,” they stressed.

Russia accounts for just 0.8% of India’s exports, but risks to export demand would increase if the slowdown in Russia’s economy had ripple effects. Pharmaceutical products, telecommunications instruments, iron and steel products, and marine products make up the majority of Indian exports to the Commonwealth of Independent States region.

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