India’s Current Account Deficit Likely to Narrow Sharply In CY23/FY24: Motilal Oswal

Indian rupee could weaken to $85 before retreating.
<div class="paragraphs"><p>A shipping container. (Source: William Unsplash)</p></div>
A shipping container. (Source: William Unsplash)

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Motilal Oswal Report

In the first nine months of FY23, India’s merchandise trade deficit widened to $215 billion from $136 billion in nine months-FY22. It means that the merchandise trade deficit stood at 8.6% of gross domestic product in 9MFY23, the worst in a decade and higher than 6% of GDP in FY22.

In Jan-23, however, it narrowed substantially and unexpectedly to $17.7 billion, compared to the Bloomberg consensus of $23.5 billion. Is this a one-off or could it narrow substantially in CY23/FY24? We believe the latter is true and this note explains why.

A look at details suggests that as much as 86% of the widening in the trade deficit in 9MFY23 was attributed to commodities – 55% by energy (fuel and coal) and another 31% by non-energy items (including edible oil, fertilisers, base metals and plastic and rubber).

The deficit in precious metals (i.e., valuables) narrowed by $4 billion to $30 billion in 9MFY23.

Assuming that commodity prices in the near future stay where they were in Feb-23 (since risks are balanced), there will be sharp contractions in prices of energy (down 24%), fertilisers (down18%) and edible oil (down 6%), with a modest rise in prices of precious metals and base metals (up 2-3%).

This should keep India’s merchandise imports down for the next six-eight months. With expectations of weak economic environment, we expect India’s merchandise imports to fall faster than exports, keeping the trade deficit subdued.

Click on the attachment to read the full report:

Motilal Oswal ECO-CAD.pdf
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