Comfort on both capital and current accounts
CAD/GDP for 3QFY14 remained comfortable at 0.8%, reflecting (1) favorable export dynamics, (2) lower non-oil, non-gold imports and (3) continued lower gold imports. While current account was in line with the 2QFY14 dynamics, capital account saw a sharp improvement owing to (1) NRI deposits and (2) FII flows. We expect CAD/GDP at 1.7% for FY2014 mostly on account of narrowing trade deficit. We expect CAD/GDP to remain benign in FY2015 at 1.1% with sufficient buffers on the capital account side. We expect USD/INR continuing in a range of 61-64 for the rest of CY2014 with the RBI shoring up its FX reserves on the back of stable capital flows.
1. 3QFY14 CAD at US$4.1 bn
2. CAD/GDP at 0.8%
3. Our new estimate for CAD for FY2015 is at US$27.3 bn
4. USD/INR expected to remain in a range of 61-64; RBI to continue shoring up FX reserves
CAD in 3QFY14 continues to be encouraging CAD in 3QFY14 was US$4.1 bn, in line with US$5.2 bn in 2QFY14. CAD/GDP in 3QFY14 was at a very comfortable 0.8% compared to 1.2% in 2QFY14. Most of comfort in the CAD was led by trade deficit remaining low at US$33.2 bn (US$33.3 bn in 2QFY14) on the back of weak imports. Non-oil imports growth of (-)23.4% in 3QFY14 reflected the weak domestic demand dynamics.
Invisibles receipts were more on a trend-line basis with software services net receipts at US$16.8 bn and transfers at US$16.4 bn. Other invisibles at (-)5.4 bn reflected the net interest outgo from India. With external debt accumulation on an uptrend for India, this component is unlikely to be lower in the next few years. For FY2015 we expect CAD to remain low at US$21.1 bn (CAD/GDP at 1.1%) under crude price assumption of US$102.5/bbl (Exhibit 1). We note that crude price at US$108/bbl would imply CAD at US$27.3 bn (CAD/GDP at 1.4%).
NRI deposits and FII flows-led capital account eases Indias external sector worries.
As expected, 3QFY14 capital flows have been much stronger at US$23.8 bn compared to (-)US$4.7 bn inflows in 2QFY14. The FCNR(B) deposit scheme started in September 2013 saw significant flows in October and November with NRI deposits in 3QFY14 at US$21.4 bn. We note that under the FCNR(B) route, the RBI had accumulated US$34 bn. FII flows, after much outflow in the previous quarters, turned positive and 3QFY14 saw net inflows of US$2.4 bn with US$6.2 bn in equities and (-)US$3.7 bn in debt. For FY2015 we expect FII flows to be ~US$10 bn. Overall, under our base case we do not expect capital account flows at US$52 bn in line with US$54.5 bn in FY2014. Overall, we expect the external sector to be a positive for the macroeconomic scenario.
USD/INR should show near-term stability
Along with the current geopolitical tensions, continuing Fed taper and related emerging market risks, India would be more susceptible to domestic uncertainties regarding the elections. However, we believe that the RBI has been able to build up a reasonable buffer to maintain the strong position on the external sector front. Our estimates for FY2014 and FY2015 on the CAD and capital account provide us with much comfort that the RBI will have adequate room to further shore up its FX reserves and thus maintain the USD/INR within 61-64 for the rest of CY2014. The key risks would be (1) unfavorable election results (due on May 16) on the domestic side and (2) escalation of geopolitical tensions on the global front. However, based on our estimate RBI should be in a comfortable position to support the INR.