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    Surging crude may take CAD past 2% of GDP, say economists


    Economists predict that India's Current Account Deficit (CAD) will increase in the second half of the fiscal year, surpassing 2% of GDP. The CAD for the June quarter was 1.1% of GDP, lower than expected, but the gap widened due to a contraction in the trade deficit. Rising crude oil prices, particularly for Russian crude, which accounts for a third of India's fuel imports, are a major factor contributing to the widening CAD. If oil prices average $100 per barrel in the second half of the fiscal year, the CAD could reach 2.1% of GDP.

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    Current Account Deficit (CAD) for the June quarter may have been benign, but that is likely to change dramatically for the rest of FY24 with little signs of crude oil prices easing amid shrinking exports.

    Economists now expect the second-half CAD to go past 2% of the gross domestic product (GDP) from June levels.

    CAD for the June quarter ended lower than consensus at 1.1% of GDP, the latest central bank data showed, almost half of the 2.1% of GDP in the same period a year ago. However, the gap widened sequentially, paced largely by a contraction in the trade deficit during the period.

    Crude prices play a major role in determining CAD accounting as fuel accounts for more than a fourth of India's import basket. Prices of Russian crude, which accounts for a third of India's fuel imports, have risen since August, increasing the probability of a wider current account gap for the rest of the fiscal year.

    Surging Crude may Take CAD Past 2% of GDP: Economists

    Russian crude touched $80 a barrel from an implied price of $66 a barrel during the June quarter. In September, the upward pressure on crude oil prices rose due to supply-side cuts by OPEC and stronger-than-expected crude oil demand. A $10 per barrel increase in oil prices worsens India's current account position by nearly $10-12bn or 30-32bps of GDP, according to Barclays Research. Looking ahead, the CAD is likely to increase in the second quarter to 2.2-2.4% of GDP according to estimates by HDFC Bank.

    The surge in crude oil prices is expected to add further upward pressure on the trade deficit.

    "In case crude oil prices average $100 per barrel in the second half of FY24, the full-year current account deficit could widen to 2.1% of GDP, which is within sustainable levels," said Gaura Sengupta, India economist at IDFC First Bank.

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