India's Q3 Current Account Deficit Likely Rose On Widening Trade Gap: Economists Poll

A revival in demand in India since the pandemic has also compounded the shortfall through higher imports, while at the same time exports to a weakening global economy shrank to a 20-month low in October

India's current account deficit was expected to average 3.2 per cent of the GDP this fiscal year before shrinking to 2.6 per cent next, according to another poll. ( Image Source :Getty )

The current account deficit in India likely spiked to its highest in nearly a decade in the July-September quarter (Q3) as rising commodity prices and a depreciating rupee stretched the trade gap even further, according to Reuters poll of economists. A revival in domestic demand in India, Asia's third-largest economy, since the Covid-19 pandemic has also compounded the shortfall through higher imports, while at the same time exports to a weakening global economy shrank to a 20-month low in October.

A Reuters poll from December 5 to 14 by 18 economists forecast for a $35.5 billion current account deficit in the July-September quarter, or 4.3 per cent of gross domestic product (GDP), the most in nearly a decade. Forecasts ranged from $24.5-$40.0 billion, or 3.3 per cent-4.7 per cent of the GDP. For the April-June quarter, the deficit was $23.9 billion, about 2.8 per cent of the GDP.

Madan Sabnavis, chief economist at Bank of Baroda, who had one of the more optimistic forecasts at just 3.3 per cent of the GDP, said, “As India continues to perform well, demand for non-oil imports will continue to increase while the global slowdown affects demand for exports. The problem this time with a (global) recession is that even demand for software services tends to decrease. This is why the issue is a little more serious."

With the Reserve Bank of India (RBI) nearing the end of its rate hike cycle the rupee, down over 10 per cent this year, is not expected to regain its losses anytime soon.

According to a separate Reuters poll looking at the longer-term view, the current account deficit was expected to average 3.2 per cent of the GDP this fiscal year before shrinking to 2.6 per cent next.

"We do not expect the external outlook to be as challenging next year as in 2022," wrote Kaushik Das, India and South Asia chief economist at Deutsche Bank.

"But the jury is out on this, as higher-than-anticipated global oil prices and increased geopolitical tensions can readily put pressure on the external sector and rupee compared to what we have factored under our base case scenario,” Das added.