India’s shrinking current account gap provides a reprieve for rupee

Economists have lowered their current account deficit forecasts for India, thanks to favorable trade trends proving to be a boon for the rupee – currently among the worst performers in emerging Asia.

Barclays plc expects the current account gap – the widest measure of trade in goods and services – to be 1.9 per cent of gross domestic product in the year starting April 1, down from a deficit of 2.3 per cent it had estimated at the time. former. Citigroup lowered its forecast to 1.4 percent of GDP from 2.2 percent previously, reflecting a steady decline in goods imports and strength in services exports.

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Lower prints will provide a tailwind to the rupee, which is vulnerable to a sell-off, given the twin deficits in the country’s budget and current account making it more dependent on foreign inflows. Narrowing the deficit will also relieve pressure on the central bank to sell foreign currency from its reserves to stabilize the currency and check imported inflation.

“We are encouraged by the fact that the narrowing of the trade deficit has continued and services exports remain strong,” said Ashish Agrawal, head of foreign exchange and macro emerging markets strategies at Barclays in Singapore. “A lower current account deficit reduces reliance on financing inflows and RBI dollar sales on margin.”

This is an additional positive for the rupee, which along with its Asian peers gained against the dollar after the Fed raised interest rates.

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Services surprise

What seems to have surprised economists is the strong services exports printing press.

services trade surplus It was strong at $14.6 billion in February, based on an adjusted surplus in January of $13.8 billion. Services exports were nearly $30 billion in both January and February, up about 40 percent year-on-year.

HSBC Holdings Plc attributes part of this rise to global capability centers created by large multinational corporations. A report by HSBC said that India is home to about 40 percent of the global GCC countries, and this percentage is only expanding as its reach increases.

“The services trade surplus is really the hero in India’s foreign trade story right now,” said Dheeraj Neem, economist and forex strategist at Australia and New Zealand Banking Group, who is confident the trend will continue.

Barclays expects improved external sector fundamentals and relatively cheap valuations to help the rupee rally later as the dollar weakens. But most remain cautious amid global volatility and the RBI’s aim to rebuild reserves at every opportunity.

This bodes well for the rupee, however, the global situation is very fluid and could adversely affect the global risk appetite for emerging market assets, including the rupee,” said Madhavi Arora, Chief Economist at Emkay Global Financial Services Ltd. . The worst performing currencies in emerging Asia last year and among the lowest this year.

“So the capital account side also needs to be monitored,” she said.