Pick Up in Economic Activity May Take Place in India’s FY22 to Fight Deficit

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The healthy growth in exports during the April-June quarter notwithstanding, the country’s current account deficit could see a big turn in FY22, changing from a surplus position in Covid hit FY21 back to a deficit situation in the current year, a report on the country’s trade position has said.

According to a report from Emkay Global Financial, the Indian economy would catch up from Q2FY22, led by tailwinds of a smart global recovery and steady progress in vaccination. This would push up imports as compared to exports and the return of the current account deficit.

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“We continue to believe that FY22 will see import growth exceeding export growth as the gradual recovery implies, while higher losses in oil-led (and higher commodities in general) terms of trade will imply current account-to-GDP to return to a deficit of 0.8% ($ 26 billion) from a surplus of 0.9% in FY21.”

The projection for a current account deficit in FY22 comes even as India has recorded the highest ever merchandise exports of $ 95 billion in the April-June quarter of the current fiscal year (FY22). This is 85% higher than exports of Q1 of 2020-21 and 18% higher than the exports of Q1 of 2019-20. It is also 16% more than the previous highest Q1 exports of 2018-19 ($ 82 billion) and is higher than the earlier peak of exports in Q4 of 2020-21 ($ 90 billion).

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The brokerage report said that despite the current account deficit position this year, healthy capital flows will ensure FY22 BoP (balance of payment) remains in a surplus of $ 50 billion.

Positive BoP dynamics should also ideally help keep a mild upward bias on INR vs. Dollar especially as global liquidity continues to chase carry in EM (emerging markets) economies, although selectively.

However, global winds may imply foreign investors would start asking for a higher risk premium from EM and it could start pressurizing EM assets, including in India.

Emkay said that India’s real rates have been negative and one of the lowest in the EM pack. Besides, continued tactical intervention by the RBI will ensure the Rupee remains somewhere in the middle of the EM pack in terms of spot returns.

Overall, Rupee performance will be caught between mixed external terms of trade, gradually changing global risk environment, the RBI’s stance, as well as fiscal fragilities, the report said.

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