India's CAD to Stay Manageable Despite Rupee Pressure: Bank of Baroda
India's (CAD) will Remain within Manageable Limits
A recent report by Bank of Baroda estimated that India's current account deficit (CAD) will remain within manageable limits for both FY2025 and FY26, mainly due to softening oil prices, which are expected to support the country's external financial position. Despite global market volatility, the report noted that stable oil prices at current levels are a favourable factor for India's import bill, helping to balance its trade dynamics. While India's import costs may still be impacted by higher commodity prices, the report expects the increase to be marginal. It pointed out that oil prices are a positive factor for the country.
Indian Rupee is Likely to Remain Under Pressure
"Overall, while we expect the CAD to remain within manageable limits in both FY2025 and FY26, the Indian rupee (INR) is likely to remain under pressure in the near term," the report said. However, India's merchandise trade deficit, which rose to a 13-month high of USD 27.1 billion in October 2024, presents some challenges. The increase was due to a rise in oil and gold imports, although export growth also showed strengthening, which grew by 17.3 percent in October, mainly due to non-oil exports.
Trade Deficit has been Higher than Previous Year
"India's merchandise trade deficit widened to a 13-month high of USD 27.1 billion in October 2024, driven by an increase in oil and gold imports," the report said. So far in fiscal 2025, the trade deficit has been higher than the previous year, partly due to a correction in global commodity prices. Looking ahead, export growth will depend on global trade trends, with concerns about rising US protectionism potentially impacting India's trade outlook, the report indicated.
Reasons for Indian Rupee Under Pressure
It added that "this is because the recent weakness in the INR stems entirely from external factors, including strong dollar and capital flight from EM markets". Moreover, the Indian rupee has seen pressure recently, mainly due to external factors such as the strong US dollar and an outflow of capital from emerging markets, which have impacted the stability of the INR. The report expects India's CAD to be around 1.2 per cent-1.5 per cent of GDP in FY25 – a manageable level for the economy. Nevertheless, ongoing capital outflows from the domestic market may continue to put pressure on the rupee, which is projected to trade with depreciation in the near future.
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