India Economic Update - A Positive Surprise on BOP

17 Oct 2022

As per Citi analysts the current account deficit (CAD) at 5.4% and the balance of payment (BOP) deficit at $38 billion may have peaked in 2 QFY 23. Better than expected software exports, a sharp jump in net banking capital, lower oil prices, and favorable year-end seasonality led to better than expected CAD and BOP. Citi analysts expect $ 9-10 billion deficit in each of 3Q/4QFY23.They have revised their BOP deficit forecast to $ 52 billion (vs $ 73 billion earlier) and CAD forecast to 3.6% of GDP(vs3.9% earlier).

• 1. Revised CAD Target
  

  The CAD deficit for the quarter was at $ 24 billion (2.8% of GDP) as against Citi analysts forecast of $32 billion. We believe that strong software net export which grew by 22 % and $ 5 billion Q1 services export, which was higher than forecasted and private remittances growth at 20% YoY on back of higher oil prices, led the better-than-expected no. on CAD.

   



• 2. Revised BOP Target
  

  In Q1 FY23, the BOP had a $4.6 billion surplus. The BOP surplus was driven by near all-time high net banking capital of $19 billion as against-$6 billion in the last quarter. Apart from this, the overall capital account surplus of $28 billion in Q1, supported by strong FDI flow of $ 14 billion helped the positive no on BOP. The net banking capital flows are very volatile and difficult to predict. Sharp movements (like we saw in Q1) in this series often get reversed in subsequent quarters, making the full year number relatively low.







• 3. Fall in FX reserves
  

  Assuming no change in valuation of underlying FX assets, Citi analysts forecast spot FX reserves to fall to $510 billion by the end of FY 23, as against $545 billion in mid-September, resulting in an overall fall of $105-110 billion YoY. While around $65-70 billion of this fall may be attributed to the BoP deficit, we do not find connection in RBI’s forward intervention actions and BoP developments. The import cover could fall towards 8.2 months by FY 23 as against 9.5 months currently.

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