Overview

India’s current account balance turned into a deficit of USD 23.9 bn (2.8% of GDP) in Q1 FY23 from a surplus of USD 6.6 bn (0.9% of GDP) in Q1 FY22. While capital account balance increased marginally in Q1 FY23 vs. Q1 FY22, the net balance of payments (BoP) position narrowed significantly, recording a meagre surplus of USD 4.6 bn in Q1 FY23 compared to a sizable surplus of USD 31.9 bn in Q1 FY22.

Highlights of Q1 FY23 Data

·     The deterioration in current account balance was single-handedly owing to the sharp expansion of merchandise trade deficit to a record high of USD 68.6 bn in Q1 FY23 from USD 30.7 bn a year ago. This is attributed to

o    Sharp rise in global commodity prices (CRB Commodity Index was up 53.6% YoY in Q1 FY23)t

o    Complete unlocking of the economy and high vaccination coverage helping to stoke domestic demand

·     Although the improvement in invisibles was not as sharp, it nevertheless touched a new quarterly peak of USD 44.7 bn vis-à-vis USD 37.3 bn a year ago. Software exports drove this improvement along with marginal support from private remittances. India’s services receipts increased significantly by 27.2% in Q1FY23 YoY and has helped to make the BoP surplus in the quarter.

·    Capital account improved moderately to a surplus of USD 28.5 bn in Q1 FY23 from a surplus of USD 25.4 bn a year ago.

o    Improvement came about despite substantial portfolio outflow of USD 14.6 bn in Q1 FY23. Sharp increase in banking capital (along with a moderate increase in foreign currency loans) to a record high of USD 19.0 bn in Q1 FY23 helps in explaining the overall steadiness in capital account.

·    Encouragingly, FDI inflow too remained strong at USD 13.6 bn, marking its second consecutive run-rate of USD 13 bn+ print.

Outlook

The moderate BoP surplus in Q1 FY23 is predominantly on account of the large swing in Banking Capital, which is reflecting in the buildup of foreign currency assets on banks’ balance sheets (rather than any traction in NRI deposits) to fund gradually improving credit appetite and to cushion their capital position. However, with global rates climbing up at a fast pace, this source of funding could taper considerably in the coming quarters.

A similar pattern can be expected in case of external loans for the corporate sector. We note that flows on account of ECBs have already turned negative in Q1 FY23. Short term trade credit could however remain supportive on the back of elevated imports (although some moderation is likely with imports reflecting lower commodity prices in the coming quarters).

Nevertheless, the outlook on foreign investment flows is relative bright. Despite global headwinds, India has been able to maintain a relatively higher rate of economic growth without seriously jeopardizing overall macroeconomic stability. This should help FDI flows to remain strong. While we do not expect FPI flows to mimic that sentiment due to aggressive rate hikes by most central banks, the period of incessant selling seen between Q3 FY22 and Q1 FY23 could give way to a somewhat stable outlook considering the correction in valuation of domestic assets and likelihood of India entering the global bond indices in early FY24.

On net basis, we expect capital account balance to post a surplus of USD 80 bn in FY23 vis-à-vis USD 86 bn in FY22. While that’s still a moderately strong number, the stress on BoP is expected to emanate from the current account side:

• Despite recent correction in international commodity prices, on average basis they continue to remain above FY22 levels
• Ongoing recovery in domestic growth coupled with pent-up demand and festive season tailwinds, imports could remain at elevated levels
• Meanwhile, expectation of a sharp deceleration in global growth could pose challenges for India’s exports

As such, we continue to see FY23 current account deficit at USD 130 bn (with some downside risk). However, we now anticipate the BoP deficit to be marginally lower at USD 50 bn vis-à-vis our earlier projection of USD 55 bn deficit.

Table 1: Key items within India’s BoP