India Insight:CAD remains contained,rising oil prices a key concern

Current account deficit (CAD) stood at US$3.4bn in Sept-16 quarter:India’s CAD widened to US$3.4bn (0.6% of GDP annualised) in the Sept-16quarter, higher than market expectation of US$2.6bn. This compared with adeficit of US$0.3bn registered in the previous two quarters. On a trailing fourquarterbasis, CAD narrowed to 0.5% of GDP as of the Sept-16 quarter vs0.8% in the previous quarter.

CAD to remain manageable: Looking at external stability risks, we believeIndia’s fundamentals remain strong on policy initiatives and the building ofpossible buffers. We expect CAD to remain manageable at 0.9% of GDP inFY17 and 1.2% of GDP in FY18. We assume: (a) global crude oil priceaverages ~US$49/bbl in FY17 and ~US$60/bbl in FY18; (b) improvementin global growth outlook in FY18 that will help stabilise exports; and,(c) reasonable gold imports on contained inflation and positive real depositrates available to households barring the sharp jump in gold demand seenpost the demonetisation measures announced by the government. Whilenarrowing CAD has lessened India’s external capital requirement, we believepolicymakers should continue to focus on increasing the share of stable andnon-debt creating FDI flows in total capital flows to help increase theproductive capacity of the economy. On currency outlook, we expectUSD/INR to average ~67.4 in FY17 and trade in the range of 67-69.5 overthe next few months.

Oil price sensitivity: Considering that India is a net oil importer with inelasticdemand, oil prices tend to have a significant impact on key macroeconomicindicators. Specifically, India imports 76% of its oil requirements. That said,global crude oil prices have risen by ~24%MoM led by OPEC’s decision to cutoutput. We estimate a US$10/bbl rise in global crude oil prices wouldincrease India’s import bill and, hence, CAD by US$11bn (0.5% of GDP).