India’s external account has been under tremendous pressure since the last quarter of 2021, due to spike in commodity prices, depreciation in rupee and foreign portfolio outflows. The Reserve Bank of India’s Monetary Policy Committee (MPC) has had its work cut out this year, having to rein inflation as well as stop the rupee from declining sharply. With the situation worsening due to the Russia-Ukraine conflict, current account deficit (CAD) for the June 2022 quarter expanded to 2.8 per cent of GDP; the highest since the taper tantrum in 2013. CAD in the September quarter is also likely to be quite high with the imports for the period (₹12.16 lakh crore) registering a growth of 25 per cent over last year, while export growth was relatively muted.
There are however reasons to hope that the pressures on external balance will ease in the second half of 2022-23, providing some reprieve to the rupee and to the MPC. The dollar which had appreciated sharply until September 2022, following the US Federal Reserve’s aggressive rate hikes and surging US bond yields, has cooled down of late, on hopes that the pace of Fed’s rate hikes could slacken. The dollar index has declined 6 per cent from its September peak. Not only does this ease the pressure on the rupee, it also reduces the price of imports denominated in dollars. Two, global commodity prices have receded from the June 2022 peak, with price of Brent crude oil declining 66 per cent since then. Besides, India has been procuring crude oil from Russia at a very deep discount of up to 40 per cent of international prices since September, according to media reports. Despite the G7 imposing a cap on the price of Russian oil from this month, India has said it will continue to import the cheaper oil supplied by Russia. Another fillip for India’s balance of payments comes from the fact that foreign portfolio investors, who had pulled out around ₹1,70,000 crore between January and October this year have pumped in around ₹40,000 crore in equity and debt markets since November. This will help mitigate the impact of the trade deficit, somewhat.
That said, while the intense pressure on external account could ease, surge in volume of imports due to rising domestic demand will continue to be a challenge for policymakers. Many of the top imports are closely linked with economic growth and could continue to increase, expanding the trade deficit. While the Centre has tried to address the deficit though higher duties on gold imports theimpact has been limited. A better way to narrow the trade deficit would be to focus on increasing exports, especially to fill the gap left by falling Chinese exports, by incentivising companies to manufacture for overseas market. The PLI scheme can be expanded and exporters need to be nudged to move up the value chain.