CAD forecast trimmed on narrower trade deficit

A narrow deficit and higher services exports in January has prompted economists to scale down the current account deficit estimates for FY'24. Even capital inflows through both FDI and portfolio flows are expected to improve during the rest of the fiscal. But potentially higher forex inflows may not mean a stronger rupee as the central bank could take this opportunity to pile up reserves

India’s merchandise trade deficit narrowed to a nine month low of $ 17.5 bn in January compared to $ 19.8 billion in December'2023. Service surplus surged to $16.8bn in January versus $16.0bn surplus in December.

Trade deficit in April-January'24 is lower at $ 206 bn compared to a deficit of USD 229 bn in the same period last year. Net services exports during the period stands at $ 138 billion compared to $ 117 billion in the same period in FY'23.


" We are now tracking the current account deficit to be lower than 1% of GDP for 2023-24 given better than expected performance of services & merchandise exports combined with a lower oil import bill" HDFC Bank said in a report.

FDI flows have improved in October-November after a net outflow in the September quarter. " Factoring in the recent trends in trade and capital flows, we revise our FY'2024E CAD/GDP to 1.1% from 1.4% earlier, with a lower goods trade deficit of $250 billon than $259 billion estimated earlier" said Upasana Bharadwaj, chief economist at Kotak Mahindra Bank. IDFC First bank has revised down FY24 Current Account Deficit estimate to 1.0% of GDP from 1.2% deficit. While Quant Eco Research maintains its FY'24 current account deficit forecast of 1.3% of GDP ($ 47 bn), it acknowledges a downside risk to this estimate.

Kotak Mahindra Bank pencils in the FY'2024 estimated capital account at $84 bn from $69 billion estimated earlier, factoring in higher net FDI inflows of $21 billion compared to $15 billion estimated earlier and higher banking capital related flows.

However, the rupee is unlikely to appreciate significantly with the RBI capping volatility; especially stemming from capital flows. " The RBI is likely to prevent sharp appreciation moves which could limit rupee gains. On the balance, we see 82.80-83.20 as the near-term range for the rupee" The HDFC report said. India's forex reserves are at $ 617 billion as of February 9th.

" The risk of rising freight and insurance cost and extended transit times (leading to delays) negatively impact exports in the coming months lingers" Bharadwaj said.