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Kanika Pasricha, economist at Standard Chartered, now expects India to post a current account (C/A) deficit of USD 57bn (2% of GDP) in FY20 (ending March 2020), and the actual FY19 deficit of USD 57bn (2.1%).

Key Quotes

“While the Q1-FY20 deficit was in line with our expectation, at USD 14.3bn (2.0%), we expect a lower annual C/A deficit for three reasons. First, oil prices are below our expectations. The Indian crude basket (ICB) price is likely to average USD 65/bbl in FY20, versus our prior assumption of USD 70/bbl. Given the elevated sensitivity (1.4) of the trade deficit to ICB prices, the trade deficit is likely to be narrower, although slower remittances should partly offset the impact on the C/A deficit.”

“Second, the non-oil, non-gold trade deficit has been narrower than initially expected. While export growth has come under pressure due to weak global growth, import growth has been lower (especially for electronics and machinery). Third, gold import volumes have been weighed down by higher prices and weak economic activity.”

“We raise our FY20 BoP surplus forecast marginally to USD 23bn from USD 20bn on a narrower C/A deficit projection, even as capital flows have slowed, especially foreign portfolio investment (FPI) flows.”

“The Q1 BoP surplus was front-loaded, at USD 14bn, due to a USD 5bn FX swap auction and bulky external commercial borrowing (ECB) and FDI flows. Meanwhile, our analysis of FX reserves (adjusted for valuation effects) indicates that Q2 BoP flows slowed c.USD 2-3bn. FPI flows continue to guide the direction of the BoP.”

“After net outflows in FY19, FPI flows recovered in Q1-FY20, but slowed sharply in Q2 on domestic growth concerns and global risk aversion. A reversal in FPI flows could lead to a sharp improvement in the BoP amid a contained C/A deficit.”