Acuite Ratings & Research, a credit rating agency, has revised its forecast for India’s current account deficit and balance of payments deficit. The agency predicts that India’s current account deficit will now be $68 billion, down from its earlier forecast of $106 billion, and the balance of payments deficit will be $17 billion, down from $38 billion.
According to Acuite Ratings, India’s current account deficit has narrowed significantly to $18.2 billion (2.2% of GDP) in Q3 FY23 from $30.9 billion in Q2 FY23 (3.7% of GDP). This narrowing of the current account deficit can be attributed to the softening of global commodity prices, strength in services trade and transfer payments, and robust momentum in banking capital as shown by the Q3 data.
The surplus in the capital account has increased to $30.2 billion in Q3 from $22.5 billion a year ago and $1.4 billion in Q2 FY23. Additionally, the net balance of payments has moved into positive territory, standing at a surplus of $11.1 billion (1.3% of GDP) in Q3 FY23 – a turnaround from a deficit of $30.4 billion (3.7% of GDP) in Q2 FY23.
The credit rating agency says that these positive developments in the external sector have provided fundamental support to the Indian Rupee, even in a challenging external environment, and have enabled it to stay in a relatively narrow band of 81-83 over the last 6 months.
Acuite Ratings attributes the significant reduction in the current account deficit to various factors, including the softening of global commodity prices. This softening has been primarily due to a fall in crude oil prices, which has helped reduce India’s import bill significantly.
Moreover, India’s services trade and transfer payments have remained strong, contributing to the narrowing of the current account deficit. Transfer payments, which include remittances by Indians working abroad, have continued to grow and have provided a significant source of foreign exchange inflows.
The report also highlights the robust momentum in banking capital, which has helped increase the surplus in the capital account. This has been attributed to the significant inflows of foreign portfolio investment and foreign direct investment, both of which have remained strong in Q3 FY23.
Acuite Ratings notes that the positive developments in the external sector provide comfort to India’s external sector. The agency believes that the material moderation in the monthly trade deficit and softening in crude oil prices will continue to support the external sector’s performance, and as a result, it has revised its FY23 current account deficit forecast to $68 billion from $106 billion earlier and BoP deficit estimate to $17 billion from $38 billion earlier.
In conclusion, Acuite Ratings & Research’s latest report suggests that India’s external sector is on a strong footing, with a significant reduction in the current account deficit, a surplus in the capital account, and a net balance of payments in positive territory. The agency believes that the positive developments in the external sector will continue to support the Indian Rupee and enable it to remain stable in a challenging external environment.
