India’s balance of payments situation is comfortable despite the recent moderation

The surplus in the current account, of $24 billion, and the smaller capital account surplus, of $64 billion, must be seen against the backdrop of economic activity having been sluggish for the better part of the year.

Dull capital flows and the expected widening of the current account deficit (CAD) caused the BOP (balance of payments) to moderate somewhat sharply in the March quarter, with the accretion to the reserves at just $3.4 billion. Nonetheless, the BoP surplus for FY21 was a robust $87.3 billion, the biggest in a long time. It helped that crude oil prices averaged about $45/barrel, the lowest in five years, and also that imports remained compressed. The surplus in the current account, of $24 billion, and the smaller capital account surplus, of $64 billion, must be seen against the backdrop of economic activity having been sluggish for the better part of the year.

India’s external sector has held up quite well against the adverse events of the past year. The strong build-up reserves, to around $600 billion, means the import coverage ratio is now at 12-13x, twice the levels seen during the taper-tantrum times of mid-2013. Moreover, the ratio of the total external debt to reserves is now 0.9, compared with 1.4. As economists point out, India is well-placed to deal with the reversal of the US Fed’s accommodative policy.

To be sure, the surplus in the BoP will come down to less than half of last year’s levels. The trade deficit will definitely increase as commodity prices—especially crude oil—stay elevated and non-oil, non-fuel imports pick-up on the back of a recovery. Unless they head well beyond $80/ barrel, however, the import bill should be manageable. The average monthly trade deficits could soon hit double-digits as vaccinations pick up and the busy season sets in. As against the surplus of 0.9% of GDP in FY21, the deficit in the current account for FY22 is pegged at anywhere between 1.1-1.6% of GDP, depending on where Brent rules.
The March quarter saw a small capital account balance, of $12 billion (about a third of the levels seen in December 2020). FDI inflows, at just $3 billion, were about a sixth of the flows in the December 2020 quarter. However, these tend to be lumpy, and the FY21 numbers were impressive. Net foreign portfolio inflows in Q4FY21 came in at $7 billion, a third of the levels seen in the December quarter. The capital account—primarily FPI flows—will, in the near term, be driven to some extent by the imminent tapering of US Fed’s asset purchases. However, unless the normalisation process in the US begins much earlier than the Fed has indicated, any big pullout of portfolio flows from India are unlikely. Economists estimate net capital inflows in FY22 in the region of $65-$70 billion.

It is important that exports do well this year and that the rupee—currently, at around levels of 75 to the dollar—doesn’t appreciate. As economists at DBS point out, currencies associated with sticky inflation and negative real rates ought to be facing depreciation pressure. However, so far, it has turned out to be quite the opposite, owing to a marked improvement in the BoP. Despite the ongoing economic sluggishness, the rupee would have appreciated substantially had it not been for the intervention by RBI. Should the rupee appreciate, it might leave exports short of the estimated $350 billion.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Source link


J&K parties’ 370 stand to decide direction of talks

The key question at the prime minister’s Jammu & Kashmir all-party meeting on Thursday is whether all political stakeholders, barring of course the...

Why social security benefits for gig workers must be expedited

Worse, the intensity of the second wave has forced most institutions to defer the employment of even informal workers, compounding their woes. (Representative...

Top 10 Kirby Series Games Ranked by Sales

Here are the top 10 Kirby games ranked by how many copies they sold:10. Kirby’s Return to Dream Land9. Kirby’s Epic Yarn8. Kirby:...

Samsung to launch Galaxy Tab S7 FE, Tab A7 Lite Android tablets in India on June 18

The Tab S7 FE is a stripped-down take on the more premium and more expensive Galaxy Tab S7 Plus. Samsung will launch its...