Capital account surplus is expected to rise despite moderating foreign inflows and a steady FDI on account of other sub-components faring better in FY22 than in FY21, it adds.
Rising global commodity prices, led by crude, coal and metals, will shave a lot off the current account leading to higher imports and a rise in current account deficit, which is likely to print at 1.3 per cent of the GDP or USD 40 billion, up from 0.9 per cent surplus last fiscal, according to a brokerage report.
However, the report, by the Wall Street major Bank of America Securities, said the balance of payments (BoP) is strong enough to defend any US Federal Reserve taper impacts on the rupee and the bond yields even though the BoP peak is history now.
Given the sharp increase in global commodity prices, particularly oil, concerns about current account deficit (CAD) and its serviceability have resurfaced. Potential taper by the Fed has only added to these jitters. “But, we see FY22 CAD at 1.3 per cent of GDP or USD 40 billion, up from a 0.9 per cent surplus in FY21, but still well-contained under the threshold of 2.5 per cent of GDP,” BofA said on Tuesday.
On the other hand, capital account surplus is expected to rise despite moderating foreign inflows and a steady FDI on account of other sub-components faring better in FY22 than in FY21, it adds.
The June 2021 quarter current account balance was surprised with a larger-than-expected surplus of USD 6.5 billion or 0.9 per cent of GDP, led by a lower trade deficit, higher-than-expected private income transfers and lower-than-usual investment income outflows.
Capital account also saw robust inflows of USD 25.8 billion and accordingly, the BoP surplus for Q1 rose sharply to USD 31.9 billion, from a small USD 3.4 billion surplus in the March 2021 quarter.
“Despite this solid start to FY22, we believe the peak BoP surplus is behind us and going forward, trade deficit and, therefore, CAD to rise sharply as domestic demand continues to recover. Imports are also expected to rise due to higher global prices, particularly oil,” it added.
Supported strongly by other flows, the capital account is set to end the year with a surplus of USD 93 billion in FY22, up from USD 64 billion in FY21. While FPI inflows are expected to moderate given already-rich equity market valuations and expectations of policy normalisation, FDI inflows are expected to stay robust.
Yet, BoP surplus will moderate to USD 53 billion in FY22 from USD 87 billion in FY21, while the basic balance (CAB and net FDI) is likely to come in close to zero as CAD gets largely offset by steady FDI inflows.
With forex reserves already up USD 60 billion this year so far, including the USD 17.9 billion special drawing rights (SDR) allocation in August, the full-year BoP surplus is seen at USD 53 billion.
Stating that they don’t see any fundamental reason for the rupee to depreciate, the report said the external position is significantly in better shape than in 2013, the potential US Federal Reserve taper is unlikely to exert any serious and sustained pressure on the rupee.
Moreover, the USD 640 billion of forex reserves can cover 13 months of imports. At the current level, forex reserves stand at 22 per cent of the GDP now versus 15 per cent in 2013.