Ratings agency ICRA expects the Q1 FY2020 current account deficit (CAD) to remain steady at $16-17 billion or 2.3 per cent of GDP, despite the recent contraction in merchandise exports and imports.
The agency in a note pointed out that the de-growth in merchandise exports and imports is likely to persist in the immediate term, especially given the year-on-year (YoY) decline in crude oil prices, and the impact of the recent customs duty hike on gold and precious metals.
"Such factors, in addition to the threat imposed by global trade wars, as well as sluggish domestic demand, are likely to restrict the overall growth of both merchandise exports and imports to low single digits in FY2020," the agency said.
Further, ICRA forecasts India's CAD to widen to $63-68 billion in FY2020, from $57.2 billion in FY2019.
According to Aditi Nayar, Principal Economist, ICRA: "The widening in the merchandise trade deficit is likely to be absorbed by a mildly higher services trade surplus and remittance flows in Q1 FY2020."
"As a result, the CAD is expected to remain largely steady at $16-17 billion or 2.3 per cent of GDP in the just-concluded quarter, relative to $15.8 billion in Q1 FY2019."
Recently released data indicates that India's merchandise exports and imports contracted by 1.7 per cent and 0.3 per cent, respectively, in Q1 FY2020.
"The prevailing YoY decline in crude oil prices and a temporary dip in gold imports following the tax changes introduced in the Union Budget, may well result in a contraction in aggregate merchandise imports as well as exports in July 2019," Nayar said.
"However, both these factors would contribute to a sizeable reduction in the size of the trade deficit in July 2019 to approximately $16-16.5 billion from the $18.6 billion recorded in July 2018, which was the highest monthly print for FY2019."
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