On Indian economy, UBS flags external vulnerability, says indicators 'stretched'

According to UBS, India's CAD doubled from 0.7 per cent of GDP in 2016-17 to 1.4 per cent in 2017-18 and the widening of CAD is likely to continue in the next financial year as well "albeit at a slower pace". UBS expects CAD at 1.8 per cent in 2018-19.

India remains vulnerable in its external position, but this does not pose any concern about the country's macro stability and is quite manageable, says a report by UBS. Image source: Pixabay

India remains vulnerable in its external position, but this does not pose any concern about the country's macro stability and is quite manageable, says a report by UBS. According to the global financial services major, although improving, India's external vulnerability indicators remain "stretched". "Our analysis indicates that while India remains vulnerable in its external position and risks are rising on the margin, they do not pose any concerns regarding macro stability yet and are quite manageable," the report authored by Tanvee Gupta Jain, Economist at UBS Securities India, said. Jain however noted that "there is no room for complacency and we think policy makers should keep a close watch on monitoring this risk".

As per the report, India's external debt increased USD 86 billion between financial year 2012-13 and September 2017 quarter, while forex reserves rose USD 108 billion during the same period, indicating that external buffers are being created. "However, we believe there is still a lot of scope for improvement," Jain said in the report.

According to UBS, India's CAD doubled from 0.7 per cent of GDP in 2016-17 to 1.4 per cent in 2017-18 and the widening of CAD is likely to continue in the next financial year as well "albeit at a slower pace".
UBS expects CAD at 1.8 per cent in 2018-19.

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"We think the widening in India's CAD over the past year has been and will continue to be led by higher global commodity prices (especially oil) and rising non-oil, non-gold imports on improved demand momentum," the report noted.

The UBS' forecast assumes average global crude oil prices (Brent) at USD 63/bbl in 2018-19, and gold imports at USD 32-35 billion on positive real deposit rates available to households.

According to data released by the Reserve Bank on Friday, CAD rose to 2 per cent at USD 13.5 billion in the December quarter, up from USD 8 billion or 1.4 per cent in the year-ago period, on the back of higher trade deficit.
On cumulative basis, CAD (Current Account Deficit) more than doubled to 1.9 per cent of GDP in April-December 2017.

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