India’s current account deficit narrowed to USD 9.2 bn (1.1% of GDP) in Q1 FY24 from USD 18.0 bn (2.1% of GDP) in Q1 FY23. With support from capital account inflows stepping up, the balance of payments surplus bulged to a 7-quarter high of USD 24.4 bn in Q1 FY24 from USD 4.6 bn in Q1 FY23.

Key granular highlights

·     Major reason behind the annualized improvement in CAD was on account of moderation in merchandise trade deficit, with decline in dollar value of imports outpacing that of exports. The decline in international commodity prices (esp. crude oil) seems to have supported this outturn.

o   The YoY change for the CRB Commodity Index and India Crude Basket stood at -11.2% and -28.8% respectively during Q1 FY24. However, such a trend has started to reverse from Q2FY24.

·    While buoyancy in services trade surplus continued, the pace of increase appears to have moderated.

·      Remittances remained flat on an annualized basis as the lagged impact of the decline in commodity prices weighed.

·    Capital account surplus increased to a 7-quarter high of USD 34.4 bn. This was entirely led by portfolio inflows (esp. in equities) that recorded a 10-quarter high of USD 15.7 bn in Q1 FY24.

o     Decline in international commodity prices, signs of key central banks approaching close to the end of their respective monetary tightening cycle, and India’s growth outperformance proved alluring for FPIs. However, the expectation of higher global interest rates for a longer period has reversed the FPI inflows in Q2FY24.  

·    Meanwhile, there was some loss of annualized momentum in the case of other forms of capital flows like FDI, Loans, and Banking Capital.

o    While moderation in external loans can be rationalized amidst high global interest rates and contraction in imports, moderation in pace of FDI is a bit perplexing - It appears that geopolitical factors could be weighing upon direct investments not just in India, but at a global level.

Outlook

The overall BoP data for Q1 FY24 is comforting and paints a constructive outlook for the entire financial year. However, we believe that most of the comfort could have got front loaded, with the quarters going forward likely to show a dilution of support, or an outright deterioration, under a stress scenario for the following reasons:




• International commodity prices have been firming up due to a combination of factors, viz. US economic resilience, persistence of geopolitical hurdles resulting in curtailment of supply in select items such as crude oil and policy stimulus in China. The CRB Commodity Index is currently trading at a 15-month high in Sep-23 (with price of India Crude Basket touching a 13-month high of USD 94 pb).

• The strategic benefit that India had (in terms of cheaper oil import) from lower price of Russian crude in most part of FY23 has dissipated since Jul-23, with price of Urals consistently trading above the G7 imposed price cap of USD 60 pb.

o    Incidentally, the share of Russia in India’s import basket dropped to a 7-month low of 8.3% in Jul-23.

• Temporary administrative interventions on trade of certain agri commodities to curb domestic inflationary pressures could provide a minor upside risk to the trade deficit.

Nevertheless, the news on India’s sovereign bonds’ inclusion in JP Morgan’s EM bond index may trigger some debt investment inflows and partly offset the current momentum in equity outflows. While actual inclusion will happen in a staggered manner from Jun-24, market players might position their investments in advance.

Considering the above upside risks on current as well as capital account, we revise our FY24 CAD forecast up to USD 67 bn (1.9% of GDP), up from our earlier estimate of USD 53 bn (1.4% of GDP). Despite this, the BoP is now likely to see a somewhat higher surplus of USD 32 bn vs. our earlier estimate of USD 24 bn.

Says Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research “ Crude oil prices always had an adverse impact on India’s external position and it is unlikely to be different this time around. The spurt in crude prices by over USD 15 pb in Jul-Sep’23 will be reflected in higher merchandise trade and current account deficit in Q2 and the subsequent quarters. Accordingly, we have revised our forecast of CAD to 1.9% of GDP in FY24. Higher interest rates in US and other developed economies along with risk of higher domestic inflation will also keep the capital flows volatile in the near term although it may get partly offset by the news of India’s inclusion in J P Morgan EM bond index from Jun’24. These developments have already been reflected in the movement of the INR that hit a new low of 83.3 to the dollar and has a significant likelihood of touching 84.0 in the near term. Nevertheless, we don’t expect any sustained pressure on India’s external metrics, given the lack of strength in the global economy and the country’s robust forex reserves.”

Table 1: Key items within India’s BoP