India Ratings and Research has revised its FY17 estimate for the country’s current account deficit (CAD) to 1.3-1.5 per cent of GDP from 1.2 per cent due to lower remittances and lower software earnings in fourth quarter for the current fiscal.
India’s CAD narrowed sharply to USD 0.3 billion or 0.1 per cent of GDP in fourth quarter of FY16 from USD 7.1 billion or 1.3 per cent in third quarter on account of lower trade gap.
For the entire 2015-16 fiscal, CAD — the difference between the inflow and outflow of foreign exchange — shrank to 1.1 per cent of the GDP.
“A low CAD suggests stability on the external front. However, there are two sides to a lower CAD for an economy like India that is reliant on private transfers, mainly remittances, and services exports to maintain a healthy and sustainable current account position,” Ind-Ra said.
It noted that on one side the low crude prices and collapse in global prices of commodities have resulted in a lower trade deficit, while on the other, oil-rich economies in the Middle East have suffered due to low oil prices, which impacted the remittances of workers overseas.
Remittances or private transfers declined to USD 63.1 billion in 2015-16 from USD 65.5 billion in 2014-15.
Services exports declined to USD 69.7 billion in 2015-16 from USD 76.5 billion in 2014-15.
Within services, software services sequentially declined to USD 17.3 billion in the fourth quarter of FY16, which is a lower level than in the previous three quarters of FY16.
The agency believes the country appears to be a net beneficiary of low oil prices despite low services and merchandise exports. Import of crude petroleum and products declined to USD 52.4 billion in FY16 from USD 81.5 billion.
“We believe sluggish global growth and weakness in prices will continue to impact exports growth, while weak domestic demand will keep a check on imports growth,” it said.
In-Ra expects the rupee to remain stable due to a steady domestic macroeconomic environment.
“The rupee will be mostly supported by the comfortable current account gap in FY17. As the concern from US Federal Reserve’s action has mostly been alleviated, the scope for an uptick in domestic growth and global risk appetite will determine the rupee trajectory,” it said adding in the near- term, the UK’s referendum will be critical and Brexit can cause major instability in the global currency market.
With limited scope for a considerable improvement in portfolio flows, the report noted that open market operations purchase will remain the preferred option for RBI to keep systemic liquidity at ease.
“In the current conjecture, with the least visibility of any rate action by RBI, incremental open market operations purchase could be the major determinant of the bond market performance henceforth,” it said.