Ukraine war: ICRA sees serious downside risks to growth; CAD is expected to exceed 3.2%

If the ongoing war pushes the average price of the Indian basket of crude oil to $115 per barrel in FY23, the CAD is expected to expand to $100-105 billion, or 2.8% of GDP.

If the ongoing war pushes the average price of the Indian basket of crude oil to $115 per barrel in FY23, the CAD is expected to expand to $100-105 billion, or 2.8% of GDP.

Rating agency ICRA has warned of serious downside risks to the economy over the next fiscal year, with a steep decline in the rupee in the current account deficit (CAD) and hardening government bond yields as a result of the crisis in Russia and Ukraine and the resulting rise in crude oil and other prices commodity prices.

International crude oil prices hit a 14-year high of $130 a barrel on March 7, up from $94 a barrel before Russia invaded Ukraine, which is the world’s third largest oil producer and accounts for 14% of global production.

The price of the Indian basket of crude oil has averaged $114.6 a barrel in March so far, up 22.9% from $93.3 a barrel in February.

At current crude oil levels, the current account deficit is likely to widen by $14-15 billion (0.4% of GDP) for every $10 per barrel increase in the average price. If the price averages $130 a barrel in FY23, the CAD will expand to 3.2% of GDP and surpass 3% for the first time in a decade, ICRA chief economist Aditi Nayar said in a report Tuesday.

If the ongoing war pushes the average price of the Indian basket of crude oil to $115 per barrel in FY23, the CAD is expected to expand to $100-105 billion, or 2.8% of GDP.

The highest CAD was in fiscal 2013 when it exceeded 4.8 percentage points and the second highest was in fiscal 2012 when it was 4.3%.

While elevated commodity prices and bearish sentiment in world markets will give the rupee, which fell to a lifetime low of 77.01 on Monday, a depreciation bias, large foreign exchange reserves of 631.5 billion should stave off a sudden sharp depreciation, she said.

The agency expects the rupee to trade in a range of 76-79 to the dollar until the conflict subsides and the 10-year G-sec yield rises to 7-7.4% in the first half of FY23 .

Higher commodity prices and a weaker rupee pose upside risks to the baseline inflation forecast, according to which the baseline effect will moderate average CPI and WPI inflation to 5% each in FY23, from 5.4% and 12% respectively in FY22.

On the growth front, Ms Nayar sees major downside risks to the 8% growth forecast for FY23 as higher commodity prices squeeze margins if the conflict continues.

According to some reports, crude oil can save 3% of GDP at current prices.

The surge in crude oil may also exacerbate the impact of higher-than-expected market borrowing for FY23 on yields, and she expects the 10-year G-sec yield to range between 7% and 7.4% in H1 .

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