India External Sector Ends Fiscal 2024 On Strong Wicket
On a fiscal-year-to-date basis, core exports growth has been positive, while healthy services exports have offset goods deficit, says Madhavi Arora.
Easing current account deficit and rising foreign exchange reserves reinforce India's improving external position. The current account balance is likely to clock a marginal surplus in the fourth quarter, with a deficit of sub-1% for the full fiscal year.
India's current account balance recorded a deficit of $10.5 billion (1.2% of the GDP) in the third quarter, lower than $11.4 billion (1.3% of the GDP) in the second quarter, according to data published by the RBI on Tuesday. It is set to ease further in the January–March period, aided by an improving merchandise trade deficit and resilient services exports.
The fourth-quarter current account is likely to turn into a mild surplus, largely due to better-than-expected performance for both goods and services exports so far, according to Madhavi Arora, lead economist at Emkay Institutional Equities, who forecasts the current account deficit at 0.8% of the GDP in FY24, with risks to the downside.
On a fiscal-year-to-date basis, core exports growth has been positive, while healthy services exports, including the meaty IT services and solidly emerging space of business consulting and financial services, have largely offset goods deficit, she explained.
Non-IT net exports have tracked more than 55% growth in FY24. This could spill on to FY25 as well, even as IT services exports growth could moderate to low single digit, and remittances may slow as well, Arora said.
"The run-rate for Q1–Q3 FY24 and likelihood of a narrower trade (goods and services) deficit in Q4 backs our expectation that full-year FY24 CAD has room to ease below 1% of GDP," Radhika Rao, senior economist at DBS Bank, said. "This, along with a spike in foreign reserves to a record high above $640 billion last week, reinforces the economy’s improving external position."
INR: An Appreciating Bias Ahead?
Supported by a substantial balance of payments surplus and the Fed rate-cut cycle, the rupee could continue to trade with an appreciating bias, according to Gaura Sengupta, economist at IDFC First Bank. The RBI intervention is likely to limit volatility in USD-INR, she said, with the USD-INR trading range in FY25 expected between 83 and 81.50.
Arora forecasts the USD-INR to trade in the range of 82.50–84.25 for Q1 FY25, with a base case of bullish-to-neutral DXY, and tactical RBI intervention keeping INR non-linear ahead and in the middle of the EM Asia pack.
A key risk to the USD-INR view is possible delay in Fed rate cut cycle, if U.S. core inflation pressures remain firm, Sengupta said.