MUMBAI: Stating that the country's external balances are stronger than expected on the back of strong inflows, a Wall Street brokerage on Tuesday projected a sharp fall in India's current account deficit to 1% this year from 2% in the last.
Current account deficit reflects the shortfall in a country's 'current' transactions with the rest of the world. Current transaction involves all transactions that do not create an obligation to return the money or create any ownership interest. As such, a high current account deficit indicates that the country is not able to fund its 'current' requirements -- such as for purchasing goods from abroad -- through other such transactions, and must rely on capital inflows for the same.
India's current account deficit will fall to $39 billion, or 1% of the GDP, said Goldman Sachs, from $67 billion in FY23. It had earlier predicted a CAD of 1.3%.
For the next financial year (FY25), it expects CAD to be 1.3%, and not 1.9% as projected earlier. This, it said, is primarily due to a downward revision to their oil price forecast to USD 81/barrel in 2024 from more than USD 90 earlier. It also noted that India's services exports -- such as IT and tourism -- continue to surprise on the positive side.
Beyond the current account, Goldman Sachs was optimistic about India's overall external balances -- including the capital account -- due to the CAD, strong capital flows, adequate forex reserves and low external debt.
Combined with this, expectations for a weaker dollar due to the likely five US Fed rate cuts this year suggest a "goldilocks" environment for the country's external balances, it noted.
The brokerage expects robust capital flows in 2024, driven by strong equity portfolio flows as the Fed starts the easing cycle; robust debt inflows as the bonds are included in the JP Morgan's global government bond index from June 2024; and higher FDI inflows with the country continuing to benefit from regional supply chain diversification.
These capital inflows should help offset lower net corporate dollar borrowing inflows owing to sizable maturities of earlier loans coming up in 2024, it said, adding overall, the balance of payment surplus should jump to USD 39 billion in FY24 but fall to USD 27 billion in the next fiscal.
The country's oil imports fell to USD 164 billion in the January-November 2023 period from USD 189 billion a year ago as oil prices were 18 per cent lower during the period.
Similarly, services trade surplus is tracking higher as exports have surprised to the upside, driven by both business and software services.
With US growth remaining resilient, the report expects services export to remain strong and services trade balance will print in at USD 158 billion up from USD 148 billion.
These two will balance out the rise in gold imports which so far stood at USD39.6 billion and may close the fiscal USD44 billion from USD37 billion in FY23.
On the other hand non-oil and non-gold imports are tracking marginally higher than earlier forecasts driven mainly by electronic goods and machinery imports among the major sub-components, and may close the year at USD445 billion from USD440 billion.
Net FDI inflows stood at USD17 billion up to October 2023 compared to USD36 billion a year ago, while both equity and debt inflows have picked up in Q3 and at the current run rates they may close at USD28 billion this fiscal up from USD24 billion.
The report sees the country's external vulnerabilities remaining low with comfortable import cover at around 11 months, higher than the pre-pandemic average of 9.5 months, and the forex reserves as a share of external debt of 99 per cent is at its highest level in the past 10 years, excluding the pandemic years.
On the rupee, the brokerage said it continues to see the rupee as a relatively low-volatility carry currency.
But quickly noted that despite this "goldilocks" scenario, the rupee is likely to underperform most EM Asia currencies as they expect the RBI to accumulate inflows and build forex reserves at every opportunity.
They continue to expect the dollar/rupee pair to hover around 83-82 in the next three to six months, and then appreciate slightly to 81 over the next 12 months.