Goldman Sees Current Account Deficit Falling To 1% Of GDP This Fiscal

Stating that the country's external balances are stronger than expected on the back of strong inflows, a Wall Street brokerage on Tuesday projected a much lower current account deficit which is likely to print at 1% for this fiscal, leaving the balance of payment surplus at $39 billion.

Goldman Sachs in a report said the country's external balances remain favourable with a combination of low CAD, strong capital flows, adequate forex reserves and low external debt.

Combined with this, expectations for a weaker dollar due to the likely five U.S. Fed rate cuts this year suggest a "goldilocks" environment for the country's external balances.

Accordingly, the Wall Street major has revised upwards its current account deficit (CAD) forecast to 1% of GDP for FY24 from 1.3% earlier, and 1.3% for FY25 from 1.9% earlier, citing a downward revision to their oil price forecast to $81/barrel in 2024 from above $90 earlier; and services exports continuing to surprise higher than prior expectations.

The brokerage expects robust capital flows in 2024, driven by strong equity portfolio flows as the Fed starts the easing cycle; robust debt inflows as the bonds are included in the JP Morgan's global government bond index from June 2024; and higher FDI inflows with the country continuing to benefit from regional supply chain diversification.

These capital inflows should help offset lower net corporate dollar borrowing inflows owing to sizable maturities of earlier loans coming up in 2024, it said, adding overall, the balance of payment surplus should jump to $39 billion in FY24 but fall to $27 billion in the next fiscal.

The country's oil imports fell to $164 billion in the January-November 2023 period from $189 billion a year ago as oil prices were 18% lower during the period.

Similarly, services trade surplus is tracking higher as exports have surprised to the upside, driven by both business and software services.

With U.S. growth remaining resilient, the report expects services export to remain strong and services trade balance will print in at $158 billion up from $148 billion.

These two will balance out the rise in gold imports which so far stood at $39.6 billion and may close the fiscal $44 billion from $37 billion in FY23.

On the other hand non-oil and non-gold imports are tracking marginally higher than earlier forecasts driven mainly by electronic goods and machinery imports among the major sub-components, and may close the year at $445 billion from $440 billion.

Net FDI inflows stood at $17 billion up to October 2023 compared to $36 billion a year ago, while both equity and debt inflows have picked up in Q3 and at the current run rates they may close at $28 billion this fiscal up from $24 billion.

The report sees the country's external vulnerabilities remaining low with comfortable import cover at around 11 months, higher than the pre-pandemic average of 9.5 months, and the forex reserves as a share of external debt of 99% is at its highest level in the past 10 years, excluding the pandemic years.

On the rupee, the brokerage said it continues to see the rupee as a relatively low-volatility carry currency. But quickly noted that despite this "goldilocks" scenario, the rupee is likely to underperform most EM Asia currencies as they expect the RBI to accumulate inflows and build forex reserves at every opportunity.

They continue to expect the dollar/rupee pair to hover around 83-82 in the next three to six months, and then appreciate slightly to 81 over the next 12 months.