Informist, Tuesday, Jun 25, 2024

MUMBAI – India's current account deficit is likely to widen to around 1% of GDP in the current financial year ending March, mainly due to a higher merchandise trade deficit, analysts said. A slowdown in net service exports and moderation in remittances will also weigh on the current account deficit in 2024-25, they said.

The current account deficit in 2024-25 is seen in the range of 0.8-1.3% of GDP, according to reports from eight banks and brokerages.

"The current account deficit will rise slightly in Apr-Mar (2024-25), while remaining eminently manageable at around 1.0-1.2% of GDP, owing to a widening in the merchandise trade deficit in this fiscal, on the back of domestic demand and higher commodity prices," Aditi Nayar, chief economist at ICRA, said.

Data from the Reserve Bank of India released on Monday showed that India's current account deficit narrowed to 0.7% of GDP in 2023-24 from 2.0% in the previous year. In absolute terms, the current account deficit fell to $23.2 bln in 2023-24 from $67.0 bln in 2022-23. The deficit narrowed in 2023-24 on the back of a current account surplus of $5.7 bln in Jan-Mar, the first surplus in 11 quarters.

Analysts expect the merchandise trade deficit to widen, besides a fall in service exports and remittances. India's merchandise trade deficit narrowed to $242.1 bln in 2023-24 from $265.3 bln the year before.

"Global trade is likely to see a rebound this year with inflation and geopolitical risks easing," ICICI Bank said in its report. "India’s exports too are witnessing a similar pick-up led by rising global demand. Imports are also seen rising on account of improving rural demand."

Most analysts expect foreign fund flows into the debt market to rise ahead of the inclusion of Indian government bonds in the global bond indices of JP Morgan and Bloomberg this year. Analysts expect inflows of around $25-30 bln on account of the inclusion of Indian government bonds in global bond indices.

"FPI equity flows have been tepid at the start of the year," Equirus Securities said. "Nevertheless, post-elections, we see outflows have stemmed and inflows have begun. With debt inflows led by index inclusion flows shaping up, together with the prospects of a rating upgrade, FPI debt inflows are likely to be a good source of funding."

Economists at Nirmal Bang said the bond inclusion might drive FPI flows into debt, while foreign flows into equities could recover after the US Federal Reserve starts cutting rates. However, there are worries about capital flows beyond 2024-25, if foreign direct investment flows do not recover, the brokerage said.

Despite the likely higher current account deficit in 2024-25, most analysts expect the Indian rupee to remain broadly steady on the back of record-high foreign exchange reserves. However, elevated commodity prices, a rising dollar, and an asynchronous global monetary policy cycle will be a drag on the Indian currency, they said.

Most analysts expect average crude oil prices to be around $85 a barrel in 2024-25. At 1454 IST, the August Brent crude contract on the Intercontinental Exchange was at $85.65 a barrel.

They expect the Reserve Bank of India to focus on limiting volatility in the dollar/rupee, with intervention on both sides and the currency to trade in the range of 83.20-83.75 a dollar in 2024-25.

"We continue to expect dollar/rupee to trade in the range of 83.25-83.75 (a dollar), though we raise our expectation for this financial year-end average to 83.40, with some near-term weakening on the back of dollar strength," Upasna Bhardwaj, chief economist of Kotak Mahindra Bank, said.

"With the timing of the US rate cut delayed and with the European region facing political instability, there is reason to believe in a continued relative appreciation bias for the dollar," Equiras Securities said. "This implies that emerging market currencies, including the rupee, stay with a relative depreciation bias, as has been recently witnessed."

The following are estimates from leading banks and brokerages on India's current account deficit:

End

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Reported by Vaishali Tyagi

Edited by Saji George Titus

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