India’s current account may be in deficit in FY22

The current account was at a surplus of $6.5 billion or 0.9% of GDP in the June quarter from a deficit of $8.1 billion in March quarter, aided by a narrowing trade deficit.

Brokerage houses and institutional reports however predicted current account to GDP ratio to be back to a deficit of 0.9-1.1% in FY22.

“We see a gradual recovery and elevated commodity prices pressurizing the import bill. We expect import growth exceeding export growth, while higher losses in oil-led terms of trade imply that the current account-to-GDP will be back to a deficit in FY22,” said Madhavi Arora, lead-economists at Emkay Global Financial Services said.

Analysts at Kotak Institutional Equities expect the external sector to face risks from further widening of the trade deficit amid normalizing economic activity, escalating energy prices, and reversal of accommodative policies across major developed markets.

“Pickup in domestic demand amid improving vaccination drive and plateauing global demand is expected to widen the trade deficit further in 2HFY22. With Brent now averaging $71.5 per barrel vs $66 per barrel earlier, we raise our FY22 CAD/GDP estimate to 1.1%. However, healthy capital flows will ensure FY22E balance of payments (BoP) remains in a surplus of $48 billion,” they said.

The BoP surplus would help Reserve Bank of India boost its foreign exchange reserves which currently stands at nearly $639 billion, said Barclays, though liquidity considerations could force the central bank to divert some of the spot flows into its forward book.

The rupee is likely to be in the range of 73-75 in the near term, Kotak said in its report as it sees the risks from a strong dollar and higher energy prices be partly offset by the robust capital flows based on improved investor sentiments ahead of expected inclusion of India in global bond indices. Besides, RBI’s record high FX reserves would cap sharp volatility emanating from higher dollar and US treasury yields.

As India’s economic recovery strengthens its appeal among South Asian economies, foreign portfolio and direct investment inflows are expected to continue strong, said Kshitij Purohit, lead international & commodities at CapitalVia Global Research. “If the rupee breaks through the 74.50 support level, RBI intervention is likely, although it may not be forceful because the central bank’s major focus and effort is on managing excess rupee liquidity in the system.

The rupee was last traded at 74.2975 a dollar.