The post-pandemic rise in exports has buffered India’s current account balance, particularly since the outbreak of the Russia-Ukraine war in 2022, notes a report by Barclays Capital. Despite the steep surge in commodities such as crude oil, natural gas, vegetable oil, and fertilisers on which India is heavily dependent, the current account deficit was a manageable 2% in FY22-23. “ Reduced current account financing and improved capital flows have added to the economy’s macro stability, a far cry from its categorisation as one of the “Fragile Five” economies a decade ago” said Rahul Bajoria .
India’s external vulnerability remains low as import cover (measured as months of imports that FX reserves can fund) remains comfortable at around 11 months compared to 7 month imports in 2012-13. Even foreign exchange reserves as a share of external debt of 99% is at its highest level in the last 10 years (excluding during the pandemic) compared to 71 percent in 2012-23 prior to the taper tantrum that escalated in September 2013 .
The Reserve Bank is also equipped with a strong armoury of foreign exchange reserves of over $ 600 billion to defend the rupee compared to $292 billion in 2012-13 adding to the market perception that RBi is being extra vigilant. “ In our view, the RBI is keeping liquidity conditions tight to protect the economy and the currency from undue volatility given the financial risks brewing globally” wrote Neelkanth Mishra, chief economist at Axis bank in his outlook for 2024.
Axis Bank expects CAD to remain at 1-1.5% of GDP in the next two years. “ The rupee’s Real Effective Exchange Rate (REER) has been remarkably stable over the past five years as the RBI has dampened volatility. Such has been the extent of volatility management, that this year the INR has been less volatile against the USD than even against the CNY” Mishra wrote.
Goldman Sachs is also forecasting a narrower current account deficit for India in 2023 and 2024 on the back of lower oil price forecasts from $86/bbl (average) to $84/bbl in 2023 and fromabove $90/bbl (average) to $81/bbl in 2024, and services exports surprising higher than prior expectationsInd-Ra expects the current account deficit to narrow down to 1.3% of GDP in FY24 (FY23: 2.0%), in response to the evolving domestic and global demand conditions. Flows in the capital account are estimated to improve to USD73.8 billion in FY24 from USD58.9 billion in FY23. As a result, there would be a net addition of USD29.8 billion in the forex reserve in FY24 (excluding cross currency valuation gain/loss). Ind Ra expects this to help the Indian rupee to average 83.05/USD in FY24, and the RBI’s intervention in the forex market to keep a lid on the rupee volatility. “The expected reversal in Fed policy stance, India’s inclusion in J P Morgan bond indices, and the slowdown in the developed economies is expected to induce higher capital flows to India unless there are new geo-political risks and surprises in the upcoming Indian election outcomes “ Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research.
