While the Finance Ministry this week said it expects the current account deficit (CAD) to narrow to 1.3% of GDP this fiscal after the provisional merchandise trade deficit eased to a nine-month low of $17.5 billion in January, DBS Bank economists went a step further and projected the year’s CAD to come under 0.8%, citing the strong services exports and declining goods import bills.
The Singapore-based bank’s economists, who pointed to benign commodity prices as a key factor in the softening of import costs that helped them slash the earlier CAD projection of 1.5% of GDP, also forecast the CAD at 1.1% for the year starting in April. DBS expects the Balance of Payments (BoP) to clock a $45 billion surplus this year, after a $9 billion deficit in 2022-23, serving as a positive for the rupee’s trajectory.
The Finance Ministry had in its monthly bulletin for January estimated the CAD to narrow this fiscal from 2% of GDP in 2022-23, before widening marginally to 1.4% next year.
DBS expects the inclusion of Indian government bonds in global indices will boost inflows and the balance of payments surplus in 2024-25, along with a slight pick-up in investment flows. However, a slightly wider CAD would shrink the BoP surplus close to $35 billion, it said.
“These dynamics are positive for the currency, yet the authorities will prefer to keep the Indian rupee in a predictable and stable range, limiting potential sharp upside in the rupee,” DBS Bank senior economist Radhika Rao wrote in a research note on India’s “favourable current account cues”.
Ms. Rao reckoned that the goods trade deficit could narrow by about 10% this year to $235 billion, from a record high of $264 billion in 2022-23, while service exports were on course to notch 7% growth and hit a record high of $348 billion.
“With imports on course to slip, the [services] trade surplus is expected to jump to a record high of $171 billion in this fiscal year. This should help the full-year current account deficit to narrow to less than 1% of GDP at 0.8% of GDP. For 2024-25, we build in a slower rise in service exports and a wider goods deficit on post-election pick-up in capital imports, leaving the CAD at 1.1% of GDP,” Ms. Rao wrote, while factoring in continued strong growth in overseas remittances.
The Reserve Bank of India has said it expects the CAD to be eminently manageable through this year as well as in 2024-25. With services exports continuing to grow even as goods exports and imports are down 4.9% and 6%, respectively, so far this fiscal, Crisil Market Intelligence and Analytics also expects the CAD to be manageable this year.
QuantEco Research economists said they expected the CAD to be at 1.3%, or $47 billion, but flagged the possibility of a downside risk owing to the turbulent disruptions to trade flows through the Red Sea.