Ukraine war: ICRA sees serious downside risks to growth; CAD to cross 3.2%

Rating agency ICRA has warned of serious downside risks to the economy next fiscal with runaway current account deficit (CAD) steep fall in the rupee and hardening yields on government bonds, as a result of the Russian-Ukraine crisis and the resultant spike in crude and other commodity prices.

International crude oil prices have hit a 14-year high at $130 a barrel on March 7, up from $94 a barrel before the invasion of Ukraine by Russia, which is the world's third-largest oil producer, supplying 14% of global production.

The price of the Indian crude oil basket has averaged $114.6 a barrel so far in March, a steep 22.9% surge from $93.3 a barrel in February.

At the current crude level, the current account deficit is likely to widen by $14-15 billion (0.4% of GDP) for every $10 per barrel rise in the average price. If the price averages $130 a barrel in FY23, then the CAD will widen to 3.2% of GDP, crossing 3% for the first time in a decade, ICRA chief economist Aditi Nayar said in a report on Tuesday.

Accordingly, if the ongoing war pushes up the average price of the Indian crude oil basket in FY23 to $115 a barrel, the CAD is projected to widen to $100-105 billion, or 2.8% of the GDP.

The highest CAD was in FY13 when it crossed 4.8 percentage points and the second highest was in FY12 when it was at 4.3%.

While elevated commodity prices and pessimistic sentiments in global markets will impart a depreciating bias to the rupee, which fell to its lifetime low of 77.01 on Monday, large forex reserves of $631.5 billion as of February 25, which is equivalent to 12.6 months of imports, are likely to avert a sudden sharp depreciation, she said.

The agency expects the rupee to trade in a range of 76-79 to a dollar until the conflict subsides and 10-year G-sec yield to jump to 7-7.4% in the first half of FY23.

Higher commodity prices and a weaker rupee pose upside risks to the baseline inflation forecast that the base effect will moderate the average CPI and WPI inflation to 5% each in FY23 from 5.4% and 12%, respectively, in FY22.

On the growth front, Ms. Nayar sees large downside risks to the FY23 growth forecast of 8% as higher commodity prices to compress margins if the conflict lingers on.

Some reports said crude at the current price can shave off 3% of the GDP.

Crude oil spike can also exacerbate the impact of higher-than-expected FY23 market borrowings on the yields and she expects a 10-year G-sec yield to range between 7 and 7.4% in H1.