Russia-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, steep fall in the rupee and a 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 USD 130 a barrel on March 7, up from USD 94 a barrel before the invasion of Ukraine by Russia, which is the world's third-largest oil producer, supplying 14 percent of global production.

The price of the Indian crude oil basket has averaged USD 114.6 a barrel so far in March, a steep 22.9 percent surge from USD 93.3 a barrel in February. At the current crude level, the current account deficit is likely to widen by USD 14-15 billion (0.4 percent of GDP) for every USD 10 per barrel rise in the average price. If the price averages USD 130 a barrel in FY23, then the CAD will widen to 3.2 percent of GDP, crossing 3 percent 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 USD 115 a barrel, the CAD is projected to widen to USD 100-105 billion or 2.8 percent of GDP. The highest CAD was in FY13 when it crossed the 4.8 percentage points and the second high was in FY12 when it was at 4.3 percent.