Kolkata: India may have slipped back to trade deficit after a brief surplus, but it may not get out of hand and hurt the currency as it did in the past. With the dollar flows remaining strong, it would rather be a test to the Reserve Bank of India‘s resolve in absorbing the inflows to prevent a currency appreciation.
Analysts are expecting current accounts to be evenly balanced in the next few quarters due to a combination of poor domestic growth, low oil prices and low demand for gold.
“Overall, we expect the current account to post a surplus in 2020, averaging 0.4% of GDP vs a deficit of 1% in 2019,” Nomura said.
With a similar take on current account trends, Kotak Institutional Equities predicted that the Indian rupee will be in a close range between 74 a dollar and 77.5 a dollar during the rest of the year. The rupee closed last week at 74.84 against the greenback.
RBI likes to keep the volatility in the exchange rate market under control. A strong dollar inflow means that the regulator has to absorb the excess flow so that the rupee does not appreciate too fast.
“Even as the momentum seen in export activity has been encouraging, a sequential improvement in import activity pushed the trade balance back into deficit. We continue to expect a current account surplus of 0.6% of GDP helped by low oil prices and weak economic activity. With capital account balance likely to be stable, we expect FY202 balance of payment to stay hugely in surplus at around $ 59.4 billion,” Kotak said, adding that “We retain our rupee range of 74-77.5,” it said.
The foreign portfolio investment flows have stabilised with the recent strong flows into equity, after a sharp sell-off in March.
India’s exports continued to shrink in July by 10.2% year-on-year but it was an improvement compared to the data in June when the exports squeezed by 12.4%. Imports also fell by 28.4% in July but at a lower rate of 47.6% in June.
Consequently, the trade deficit widened more than expected to $ 4.8 billion in July after recording a surplus of $ 793 million in June.
“As the economy gradually normalises, we expect both export and import growth to recover, although the current differential between their growth rates is still likely to remain somewhat wide in the near future,” Nomura said, expecting some of these conditions to reverse in the second half of the year.
Anticipating higher demand for imports and rise in oil prices, Nomura expects the current account deficit to most likely slip into deficit territory in the second half of the year.