CAD may fall to 2.2%, thanks to oil slide

The ongoing fall in the price of crude oil has made the government rethink its projections for the current account deficit (CAD) for the year, a senior Finance Ministry official said.

Where it was earlier expecting a CAD of 2.8% of GDP, it has now revised its estimate down to 2.2%, he said, adding that if oil prices maintain this trajectory, CAD could fall below 2% next year.

Easing pressure
Analysts and experts have been expressing worry over the effect of rising oil prices on CAD, which is the difference between the inflow and outflow of foreign currency. Being a major oil importer, rising oil prices meant more foreign exchange leaving the country. But some of this pressure has eased with oil prices falling over the last two months and the rupee strengthening against the dollar.

“When global oil prices were over $80 a barrel, it looked like India’s current account deficit for 2018-19 would come to 2.8% of GDP,” the official said, not wanting to be named as the Finance Ministry is in its quarantine period before the Interim Budget.

“However, with the sharp fall in recent weeks, the current trajectory suggests a deficit of around 2.2% of GDP for this financial year.”

“If oil prices remain at current levels into next financial year, the full year impact of lower oil prices would bring the current account deficit well below 2% of GDP in 2019-20,” the official added.

The CAD was 1.9% of GDP in the financial year 2017-18 and 0.6% in the year before that. It stood at 2.4% in the first quarter of this financial year.

Oil price increased 17.7% in two months from $72.4 per barrel on August 1 to a historical high of $85.2 per barrel on October 4. Prices fell drastically thereafter to as low as $58.6 per barrel on November 30.

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