India could close Q1 with current account surplus

Likely to close FY21 with lowest CAD in 16 yrs

NEW DELHI: India is likely to witness a current account surplus in Q1, FY21, as trade deficit has declined to $9.12 billion and surplus in services trade during April-May 2020 having reached $13.98 billion.

However, Ind-Ra estimates the current account to be in deficit of 0.1 per cent of GDP ($3.3 billion) in FY21, which will be the lowest current account deficit in the last 16 years.

India witnessed a surplus on current account in Q4, FY20 ($558 million, 0.1 per cent of GDP) after a gap of 51 quarters. The last time India had witnessed a current account surplus was in Q4, FY07 ($4,223 million).

Capital account

Capital account of India has remained in surplus for most of FY01-FY20; there have been only three instances (FY09, FY12 and FY19) when inflows in capital account fell short of covering the current account deficit, Ind-Ra notes.

Stating that net foreign direct investments (FDIs) have been a major and the most stable source of inflows in the capital account, the rating agency added in its note that the FDI averaged at $35.13 billion as against net average portfolio inflows of $5.23 billion during FY16-FY20.

Loans (external assistance, government borrowings and short-term credit) are estimated to increase to $25.9 billion in FY21. Ind-Ra said it expects the capital account inflows to increase to $67.3 billion in FY21 (FY20: $83.2 billion), leading to $64 billion increase in foreign exchange reserves.

A rise in global uncertainty or geopolitical tensions often leads to capital seeking flight to safety, thereby foreign portfolio investments leaving the shores of emerging markets.

 

FPI flight

COVID-19 also triggered this behaviour, and India witnessed a foreign portfolio investment (FPI) outflow of $16.05 billion in March 2020 and $1.97 billion during April-May 2020.

“However, unlike the episode of taper tantrum of 2013, the impact of foreign investors pulling their money out of India did not lead to any macroeconomic instability,” the note added.

Interestingly, foreign exchange reserves increased to $517.64 billion (foreign currency assets: $477.81 billion) on July 17, 2020 from $476.88 billion ($442.21 billion) at end-March 2020. “It is this swelling of foreign exchange reserves that in combination with benign oil prices and tepid imports, leading to a current account surplus, has helped the Indian rupee to remain broadly stable since mid-March 2020, despite deterioration in some of the other macro parameters such as retail inflation, fiscal deficits and negative GDP growth,” the Indi-Ra explained.

 

Indian rupee vs dollar

It estimates the average value of rupee to be $75.98/USD in FY21 (FY20: INR70.88/USD). Surplus in services trade averaged $76.489 billion during FY16-FY20. Due to the COVID-19 pandemic, the revenue growth expectations of leading Indian software companies are flat to low single digit for FY21. Ind-Ra expects trade in services to decline 14 per cent yoy in FY21 to $73 billion.

Transfers or remittances is another big component of invisibles and averaged $65.24 billion during FY16-FY20. Ind-Ra expects net transfers to decline 25 per cent yoy in FY21 to $57.2 billion. According to World Bank, remittance flows in 2020 are projected to decline across all regions in the world.

 

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