India's Current Account Deficit Is Likely To Be At 3 Per Cent: SBI ReportA positive shock to oil prices leads to immediate and sharp increase in CAD but the same dissolves completely in about eight quarters

The State Bank of India has said that India's current account deficit is likely to be lower at 3 per cent against the minimum consensus of 3.5 per cent, citing rising software exports, remittances and a likely $5 billion jump in forex reserves via swap deals.

"Every $10 increases in crude prices impacts the current account deficit 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," said Soumyakanti Ghosh, the chief economic advisor at SBI, in a statement, while adding that a positive shock to oil prices leads to immediate and sharp increase in CAD but the same dissolves completely in about eight quarters.

He added that, "The strong remittances and software exports have lowered CAD by 60 bps in the June quarter. If these 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."

Exchange rate is the major contributor to software exports growth and 40 per cent of its variation is explained by exchange rates. "If we translate these numbers in actual terms, every INR 1 fall against the dollar leads to an increase in software exports by $250 million," said Ghosh.

According to Ghosh, forex reserves that have declined from $642 billion in September 2021 to just about $531 billion last week are expected to rise by $5 billion as swap transactions reverse.