India’s capital account inflows to rise upto $67.3 billion in FY21

Swelling foreign exchange reserves along with a current account surplus, has aided the Indian rupee to remain broadly stable since mid-March 2020, India Ratings and Research said on Thursday.

Accordingly, the Indian currency has remained stable despite deterioration in some of the macro parameters such as retail inflation, fiscal deficit and negative GDP growth.

The ratings agency estimates the average value of the rupee to be Rs75.98 per USD in FY21 and expects the capital account inflows to increase to $67.3 billion in FY21, leading to a $64 billion increase in foreign exchange reserves.

“India is a net commodity importer especially due to a high oil import bill. As a result, the country’s trade account is in perpetual deficit. However, a sustained surplus in services account coupled with remittances, together known as invisibles, provides adequate support to the trade deficit,” the ratings agency said in a statement.

“As the FY21 growth outlook is bleak and Ind-Ra expects the economy to contract 5.3 per cent YoY in FY21, both exports and imports could decline for the second consecutive year in FY21. Therefore Ind-Ra expects trade deficit to decline to a 13-year low to $101 billion in FY21.”

According to the statement, surplus in services trade averaged $76.489 billion during FY16-FY20.

“Due to the Covid-19 pandemic, the revenue growth expectations of leading Indian software companies are flat to low single digit for FY21,” the statement said.

“Ind-Ra expects trade in services to decline 14 per cent YoY in FY21 to $73 billion. Transfers or remittances is another big component of invisibles and averaged $65.24 billion during FY16-FY20.”

“Ind-Ra expects net transfers to decline 25 per cent YoY in FY21 to $ 57.2 billion. According to the World Bank, remittance flows in 2020 are projected to decline across all regions in the world.” As per the statement, India witnessed a surplus on current account in 4QFY20 after a gap of 51 quarters.

“The last time India had witnessed a current account surplus was in 4 QFY07. Ind-Ra expects a current account surplus even in 1QFY21, as trade deficit declined to $9.12 billion and surplus in services trade during April-May 2020 was $13.98 billion,” the statement said. “However, Ind-Ra estimates the current account to be in deficit of 0.1 per cent of GDP in FY21, which will be the lowest current account deficit in the last 16 years.” Besides, the rating agency pointed out that capital account of India has remained in surplus for most of FY01-FY20; there have been only three instances when inflows in capital account fell short of covering the current account deficit.

“Net foreign direct investments have been a major and the most stable source of inflows in the capital account. It averaged $35.13 billion as against net average portfolio inflows of $5.23 billion during FY16-FY20,” the statement said.

“Loans are estimated to increase to $25.9 billion in FY21. Ind-Ra expects the capital account inflows to increase to $67.3 billion in FY21, leading to $64 billion increase in foreign exchange reserves.”

Meanwhile India’s foreign exchange reserves increased by $3.108 billion during the week ended July 10.

According to the Reserve Bank of India’s weekly statistical supplement, the reserves grew to $516.362 billion from $513.254 billion reported for the week ended July 3.

India’s forex reserves comprise foreign currency assets (FCAs), gold reserves, special drawing rights (SDRs), and the country’s reserve position with the International Monetary Fund (IMF).

On a weekly basis, FCAs, the largest component of the forex reserves, edged higher by $2.372 billion to $475.635 billion.

With the resumption of economic activities, consumer confidence in the country has improved in July, according to the monthly Refinitiv-Ipsos Primary Consumer Sentiment Index (PCSI).

A statement from Ipsos said that the consumer sentiment index for India has moved up 2.6 percentage points in July 2020. In June, there was a minor uptick of 0.4 percentage points after steep falls in April and May.

The monthly PCSI, which is driven by the aggregation of the four weighted sub-indices, has shown recovery across all the four indices in July 2020.

While the PCSI Employment Confidence Sub-Index has minorly recovered by 0.7 percentage points, the Economic Expectations Sub Index has surged significantly by 4.9 percentage points. Further, the PCSI Investment Climate Sub-Index has increased by 2.1 percentage points and the Current Personal Financial Conditions Sub-Index has risen by 2.2 percentage points, over June.

Indo-Asian News Service