The narrowing in India’s goods trade deficit in January is likely to soon reverse as the recovery in domestic demand and oil prices pushes up imports. But while this means that India’s recent current account surplus is unlikely to last for long, economists at Capital Economics still expect further small gains in the rupee against the US dollar over the coming years.
Key quotes
“Exports will remain supported by unprecedented global demand for vaccines over the coming quarters. After all, India is home to the world’s largest producer. But exports more broadly are unlikely to receive a substantial lift even as the global economic recovery continues, given that they have already rebounded back to near pre-virus levels.”
“The rebound in global oil prices still has further to run given the stronger outlook for oil demand. We now expect the price of Brent crude oil to rise to $70pb by the end of this year, from around $63pb currently. Consequently, the dip in oil imports in January should prove temporary. In addition, domestic demand is likely to continue picking up, particularly as fiscal policy has turned more supportive.”
“If we are right in expecting the trade deficit to widen further ahead, India’s current account surplus is likely to tip back into a small deficit of around 1.0% of GDP in 2021, and 1.5% of GDP in 2022. That shouldn’t spell trouble for India’s capital inflows given the backdrop of improving global risk appetite. Indeed, it’s likely that the RBI will continue making FX purchases to take some appreciation pressure off the rupee.”
“We expect the rupee to make small gains against the US dollar over the coming years, from around 73.00 currently to 72.00 by the end of 2022.”
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