Rise in crude prices pose risk to India’s current account deficit

Crude oil prices may rise further in the coming months, following which India’s current account deficit will be around 2.4 per cent in 2018-19, says a Goldman Sachs report.

According to the global financial services major, the rise in international crude prices poses risks to India’s current account deficit. “Our commodities team expects oil prices to continue to rise over the course of this summer, before moderating slightly at the end of the year. We recently increased our 2018-19 current account deficit (CAD) forecast to 2.4 per cent of GDP (from 2.1 per cent of GDP earlier),” Goldman Sachs said in a research note.

CAD widened to 2 per cent or USD 13.5 billion in the October-December quarter of 2017, up from 1.4 per cent, or USD 8 billion, in the corresponding period a year ago. Globally, brent broke through the USD 80 a barrel mark yesterday for the first time since November 2014.

“The recent spike in oil prices following the

withdrawal of the US from the Iran nuclear deal poses additional upside risks to our headline inflation forecast. We estimate that a 10 per cent increase in crude oil prices leads headline inflation to rise by 10 basis points,” the report noted. Goldman Sachs forecasts 2018-19 headline CPI inflation to average 5.3 per cent.

On RBI’s policy stance, the report said, a more hawkish stance by the central bank is likely following a weaker currency (the rupee has depreciated by 6.6 per cent against the US dollar year-to-date) and concerns over a rising current account and fiscal deficit.

The Reserve Bank will announce its second bi-monthly monetary policy on June 6. “We expect RBI to keep policy rates on hold at its meeting on June 4-6, but shift to a hawkish tone,” it noted. The first bi-monthly monetary policy meeting of 2018-19 was held on April 4-5 and the panel had decided to maintain status quo on the interest rate citing inflationary concerns .