Mumbai: State Bank of India has pencilled in lower current account deficit at 3 per cent for this fiscal as against the minimum consensus of 3.5 per cent, citing rising software exports, remittances and a likely USD 5-billion jump in forex reserves via swap deals.
Every USD 10 increase in crude prices impacts the Current Account Deficit (CAD) to the tune of 40 basis points while the same on fuel inflation is 50 bps and also results in 23 bps decline in growth, according to Soumyakanti Ghosh, the chief economic advisor at SBI.
CAD has a counter cyclical shock absorber, he said in a report on Thursday.
Exchange rate is the major contributor to software exports growth and 40 per cent of its variation is explained by exchange rates. “If we translated these numbers in actual terms, every Re 1 fall against the dollar leads to an increase in software exports by USD 250 million”.
This, along with an expected USD 5 billion-forex reserve accrual by way of swap transactions and higher remittances, will cap CAD at 3 per cent of GDP as against the average lowest level projected for the year at 3.5 per cent, Ghosh said.
The strong remittances and software exports have lowered CAD by 60 bps in the June quarter, adding that if this trends continued in the September quarter, then CAD would be below 3.5 per cent in the second quarter and at 3 per cent in the full fiscal. Even otherwise, the chances of it exceeding 3.5 per cent of GDP are minimal, he added.
According to Ghosh, forex reserves, which have declined from USD 642 billion in September 2021 to just about USD 531 billion last week, are expected to rise by USD 5 billion as swap transactions reverse.
The biggest impact on CAD is oil imports, which form as much as 30 per cent of the country’s import bills. Therefore, any increase in oil price has a direct impact on the trade deficit by increasing the import bill and consequently widening the CAD.
Software exports have been rising with the share of offsite mode of exports of software services by domestic IT services companies soaring to 88.8 per cent in FY22 from 82.8 per cent five years ago.
Ghosh said that a positive shock to oil prices leads to immediate and sharp increase in CAD but the same dissipates completely in about eight quarters.
In case of GDP, positive fall in oil prices leads to immediate decline which, however, starts reversing after three quarters and completely dissipates after the seventh quarter.
With inputs from Agencies