FinMin Aims To Rein In CAD at 2.2 To 2.3 Percent With Lower Crude, Higher Rupee

With vital macro statistics of the Indian economy showing remarkable improvement, the government hopes to end the year with a relatively lower current account deficit (CAD) of 2.2 to 2.3 percent of the GDP against an earlier estimated 2.8 percent, top officials in the finance ministry said.

The fall in oil prices starting October and firming up of the rupee against dollar rise has generated fresh hope for the government that now sees substantial reduction in its import bill in the second half of the year, preventing CAD from shooting up beyond a reasonable margin.

According to analysts, a USD 10 fall per barrel of crude oil prices leads to savings on an annualized basis about USD 8 billion for the government. The Indian rupee has also appreciated to Rs 71.29 versus the dollar as the Indian currency continues to strengthen against the greenback.

Global oil bounced back above USD 63 after a slide, but glut worries persist and the American Petroleum Institute says US crude oil inventories are falling. OPEC may also push for supply curb to prevent a further fall in oil prices. But as of now crude is on the lower side after hitting USD 85 a barrel and India being a net importer of crude, the CAD is estimated to be narrowed down.

The CAD is the difference between the inflow and outflow forex. It is linked to global oil prices because forex is mostly spent on crude. The CAD, which is now 2.5 percent of the GDP, was perilously close to moving up towards 2.8 percent if the oil price surge had continued. Japanese analyst firm Nomura had even predicted it widening to 2.8 percent of the GDP in 2018-19.

About USD 900 million have already been pulled out by foreign investors (now on a selling spree) from the Indian equity market on account of widening CAD, rising oil prices and the depreciating rupee. And with crude touching the highest last month in the past four years, it was certain to have adversely impact the CAD. The policy of the United States also hardens the dollar, which was hurting all currencies of the world.

While the finance ministry attempted to bridge the CAD and bolster flows by lowering the sovereign borrowing target by Rs 70,000 crore for the current fiscal and withdrawing the withholding tax on masala bonds for now, the government allowed public sector oil marketing companies to raise USD 10 billion through external commercial borrowing (ECB). The government also raised the import duty on a range of items including air-conditioners, refrigerators, washing machines, footwear, jewelry, furniture fittings and tableware besides imposing it on aviation turbine fuel (ATF). Basic customs duties were also raised on 19 tariff lines that accounted for an import bill of Rs 86,000 crore in FY18 by 2.5 to 10 percentage points.― mydigitalfc

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