Overview

India’s current account deficit narrowed to USD 1.4 bn (0.2% of GDP) in Q4 FY23 from USD 16.8 bn (2.0% of GDP) in Q3 FY23 and USD 13.4 bn (1.6% of GDP) in Q4 FY22. The sequential improvement in CAD partially compensated for the moderation in capital account flows, thereby resulting in a surplus in the balance of payments position, which printed at USD 5.6 bn in Q4 FY23. 

Highlights of Q1 FY23 Data

·     Pick-up in invisibles on account of services and remittances has been the underlying theme in FY23 and the data for Q4 attests to that.

o    The post pandemic shift towards digitization and cost optimization has benefitted Indian IT exporters and service providers. This has been complemented by a structural pick up in other business services. In addition, the dilution of the Covid threat and the removal of associated restrictions have also benefitted tourism related earnings. 

o       Remittances found support from lagged impact of high commodity prices (average Brent crude price touched a 9-year high of USD 95 pb in FY23) and a reasonably strong global economic activity (IMF’s estimate of 2022 World GDP growth stands at 3.4%, close to the pre pandemic decadal average of 3.7%).

·    The reduction in the merchandise trade deficit played a complementary role in the compression of CAD. Recent softness in commodity prices accompanied by some moderation in domestic demand are key factors behind this outturn.

·     Capital account surplus moderated sequentially owing to outflows under Bank Capital and net outflows from FPIs. Although FDI showed signs of a mild pick-up in Q4, overall momentum has remained tepid post Q1 FY23, which is possibly due to heightened global uncertainty in the form of volatile geopolitics and multi-decade high pace of monetary tightening by key central banks. Meanwhile, net external commercial borrowing by corporates turned positive in Q4 after being in negative territory for three consecutive quarters. Sharp drop in US yields in Mar-23 on account of banking sector stability concerns could be behind this turnaround.

Outlook

For FY23, CAD printed exactly in line with our expectation of USD 67 bn (2.0% of GDP), although the BoP deficit turned out to be marginally better at USD 9 bn vs. our expectation of USD 17 bn. Going forward, we maintain our call of further compression in CAD towards USD 53 bn (1.4% of GDP) in FY24, led by:

• Lower commodity prices in FY24 over FY23 (Q1 FY24 average for Brent crude price currently stands at USD 78 pb vs. USD 112 pb in Q1 FY23). The increased Russian imports of crude would further act as an additional support.

• Moderation in domestic demand (we expect GDP growth to moderate to 6.0% in FY24 from 7.2% in FY23)

We expect FPI flows to turn around strongly as key central banks approach their terminal rates while India maintains macroeconomic stability along with a higher growth trajectory. As such, we now revise up our FY24 BoP surplus projection to USD 24 bn from USD 14 bn earlier.

Says Suman Chowdhury, Chief Economist and Head-Research “ The improvement in India’s external position started in Q3FY23 with the moderation in oil prices and a buoyancy in services exports. This got further reinforced in the last quarter of the previous fiscal, reflected through a better CAD print and a BOP surplus in consecutive two quarters in Q3/Q4. Consequently, India’s total reserves have recovered from a low of USD 537 bn as on Sept 23, 2022 to 596 bn as on June 16, 2023. We believe that the uptrend in CAD and BoP position should sustain in FY24 with the continuing moderation in commodity prices, the steady growth in services exports and the expectation of a recovery in FII capital inflows. Accordingly, we have projected a CAD of USD 53 bn (1.4% of GDP) and a BOP surplus of USD 24 bn in FY24. Notwithstanding the short term volatility, we see an appreciation bias in the INR in the current year.”

Table 1: Key items within India’s BoP

Chart 1: FPI inflows have seen a strong performance in Q1 FY24