Overview

India’s current deficit widened to USD 13.4 bn (1.5% of GDP) in Q4FY22 from USD 8.2 bn (1.0% of GDP) a year ago. The deterioration in the capital account pushed the net balance of payments (BOP) position into a deficit of USD 16 bn. This marks the first deficit on BoP in as many as 13 quarters.

Highlights of Q4 FY22

• The deterioration in current account balance was single-handedly due to the expansion of the merchandise trade deficit to USD 54.5 bn in Q4 FY22 from USD 41.7 bn a year ago, even as invisibles surplus improved to a fresh record high of USD 41.1 bn in Q4 FY22 from USD 33.6 bn in Q4FY21.
• The expansion of the trade deficit can be attributed to – 1) The sharp rise in global commodity prices along with, 2) Reopening of the economy and progress on vaccination aiding pent-up demand for imports.
• Upside in invisibles was led by strength in services of software and business services, along with private transfers.
• Capital account slipped into a deficit of USD 1.7 bn in Q4 FY22, for the first time since the Taper Tantrum episode of Sep-13. The downside, as expected was owing to heavy portfolio outflows in the quarter, to the tune of USD 15.2 bn. This marks the highest portfolio outflows from India seen historically, building on the USD 5.8 bn of outflows seen in Q3 FY22.
• Adding pressure to outflows in the quarter, Banking Capital saw a deficit of USD 6.0 bn along with Other Capital at USD USD 7.2 bn.
• Nevertheless, the two bright spots on capital account were FDI flows and Loans -
• FDI rose to the highest level in last 6 quarters of USD 13.8 bn in Q4 FY22 compared to USD 2.7 bn a year ago.
• Loans clocked the second consecutive quarter of a phenomenal run rate, at USD 12.9 bn supported by a pick-up in ECBs (External Commercial Borrowings).

Outlook

The slippage of net capital account into a deficit in Q4 FY22 was somewhat surprising – both in terms of timing and magnitude but is a reflection of the stressed global financial environment.

Heading into FY23, the comfort on BoP is likely to remain low amidst the commodity price shock exacerbated by the ongoing Russia-Ukraine conflict.

• With first quarter of FY23 nearing completion, the price of Brent has averaged at USD 112 pb so far. Overall for FY23, we expect crude oil prices to average in the range of USD 100-110 pb .
• As such, we also expect FY23 current account deficit in the range of USD 90-105 bn i.e. (2.6%-3.0% of GDP). The expectation of the expansion of the current account deficit not just rests upon the likelihood of elevated global commodity prices, but is also contingent upon the following factors:
• The ongoing geopolitical crisis would dampen world trade volume (recently the WTO scaled down its projection for merchandise trade volume growth for 2022 to 3.0% from 4.7% projected earlier).
• Unlocking of the domestic economy post the Omicron wave along with vaccination drive gaining critical mass is expected to support domestic demand for imports.
• In the very near term, a marginal adverse impact on exports can also come from the recently imposed export restrictions by the government in case of select commodities.
• The pressure on current account deficit is increasing at a time when portfolio outflows have remained persistently high since Oct-21. In the last 9-months, Indian markets have seen a cumulative portfolio outflow of over USD 34 bn. Elevated domestic equity valuations, surge in global commodity prices, and aggressive normalization of US monetary policy could keep portfolio flows under pressure in the near term..
• As such, we now expect FY23 BoP to register a deficit to the tune of USD 33 bn vis-à-vis our earlier forecast of USD 8 bn deficit.

Table 1: Key items within India’s BoP