CAD to be higher in FY’25 on higher domestic demand and global prices

India’s strong economic growth at a time when the global economy is not doing too well could have an impact on its current account deficit. The July trade numbers with the deficit reaching a nine month high of $23.5 billion also point to that as import bill rose and exports were hard to pick up.

India’s economy has been growing at an average of 8 percent for the last three years at a time when major advanced economies are seeing a slowdown in growth. Though not the entire growth over the period is consumption driven, of late consumption demand is seen picking up and a sizable portion of this demand is met through imports either through import of the product or raw materials.

” Household consumption is supported by a turnaround in rural demand and steady discretionary spending in urban areas” said RBI governor Shktikanta Das in his August 08, monetary policy statement, ” Merchandise exports expanded in June, although at a slower pace. Expansion in non-oil-non-gold imports accelerated reflecting the resilience of domestic demand.”

Trade data shows a similar trend in July as electronic and miscellaneous imports accounted for a big share along with crude imports. As a result the current account deficit numbers may not be as comfortable as in 2023-24, Market estimates range from 1 to 1.5 percent of GDP compared to 0.7 % of GDP in FY’24

” Range-bound movement in international commodity prices along with a moderate recovery in prospects of global trade would likely result in a minor uptick in the current account deficit” said QuantEco Research. an independent economics research firm based in Mumbai. The firm estimates that FY’ 25 current account deficit is 1.3% of GDP.

The FY25 estimate builds-in rise in trade deficit with domestic demand relatively stronger than external demand. Services surplus is expected to remain steady with pick-up in services imports, according to Gaura Sengupta, chief economist at IDFC First bank. The bank estimates FY’ 25 current account deficit at 1.3% of GDP.Indian crude basket is assumed to average at $80pb to $85 per barrel in FY’25 compared to $82.5 per barrel in FY’ 24. “Crude oil imports from Russia had kept the crude oil import bill contained in FY24. As mentioned above the support from discounted crude oil from Russia might be lower in FY’25” according to Sengupta.The trend in merchandise trade is expected to continue in August as well as the central bank is expected to have sold nearly $5 billion in August so far to limit depreciation due to dollar demand.