External Trade: Current Account Surplus to Support INR

08 APRIL 2020

  • Citi analysts expect India’s current account to turn surplus (at ~0.5% of GDP) in FY21, first time in 17 years. However, capital account surplus (at ~1.4% of GDP) may fall to its lowest since the Global Financial Crisis (GFC).
  • FPIs pulled out ~USD 18.5bn from Indian debt and equity markets between mod-Feb and March-end driven by severe risk-off sentiment. Citi analysts however expect some inflows in 2HFY21, driven by the RBI’s move to further open bond markets to FPIs and an expected recovery in the equity markets (Nifty targeted to reach 10,100 by Mar21).
  • Citi analysts expect net FDI inflows to fall by a USD 9-10bn in FY21, given uncertainty around domestic growth and a general risk aversion. External Commercial Borrowing, which reached a 7yr high (USD 27bn) in FY20 is also expected to decline materially, due to both dollar liquidity shortage and lower credit demand.
  • *Green and red bars indicate year-on-year USD change in individual current account components. Red (green) indicates worsening (improvement) of current account balance. Source: Citi Research
  • Regions most effected by the outbreak (like China, US, Europe, S. Korea, etc.) account for over half of India’s exports. Further, the crash in oil prices may also affect exports to the Middle East (16% of India’s total exports). Citi analysts expect real exports and import growth to decline -6% YoY and -7% YoY respectively in FY21.
  • Citi analysts expect lower oil prices (avg ~USD 26/bbl in FY21) to drive India’s oil import bill down by USD 67bn in FY21 (vs prior year). Oil exports are expected to fall by 40% YoY as well.
  • INR (down ~7% YTD vs USD), may continue to be under pressure from portfolio outflows over the near term, while the benefits of current account surplus may only play out in the medium term as the economy stabilizes.
  • Despite downside risks from USD appreciation, large upcoming ECB repayments and risk of sovereign rating downgrade, Citi analysts believe that the RBI has sufficient foreign currency assets to keep INR within the 74-76/USD range, assuming the spread of Covid-19 remains contained in India.



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