“India’s external balance is deteriorating,” economists at Goldman Sachs Group Inc. wrote in a note on Thursday, “a blow to trade terms from higher commodity prices and weak global growth.” “Going forward, the deteriorating external balance is likely to push the trajectory of the rupee weaker against the dollar.”
While the Reserve Bank of India has started raising rates, which generally favors currencies, the move affects the domestic stock market as well, and could accelerate the weaker outflow of the rupee. Meanwhile, demand for the dollar is rising, putting further pressure on the currency and forcing the RBI to dip into its plethora of reserves to support it.
The central bank says the risks are manageable so far and the external sector is “well buffered to withstand ongoing trade shocks and portfolio outflows.”
The following four charts provide an in-depth look at the challenges facing India’s external finance:
widening deficit
According to a Bloomberg survey at the end of June, India’s current account deficit – the broadest measure of trade – will likely increase to 2.9% of GDP in the fiscal year ending March 31, almost from the level seen in the previous is doubled. year.
“The current account deficit The widening has been relentless,” said Rahul Bajoira, an economist at Barclays Plc in Mumbai. “Broad-based increases in commodity prices are likely to sustain deficits in the near future, and, along with capital outflows, will increase external financing requirements.”
If it starts approaching 4% of GDP, then policy makers will have to take both fiscal and monetary measures, he said.
falling stock
India’s foreign exchange reserves, which can cover nearly 10 months of imports, have fallen by more than $50 billion from their peak in September to $587 billion in the week to June 17 as the RBI seeks to stabilize the currency and imports. Want more dollars for expensive energy. Import.
RBI is fighting on several fronts to slow the depreciation of the rupee, while its stated stance is that it intervenes to contain the currency’s volatility and does not affect its direction. Still, the RBI has spent $18 billion in the spot market to support the rupee between January and April, the latest data from the central bank showed.
costly imports
Indians trade deficit It hit an all-time high of $24 billion in May after the country’s import bill nearly doubled due to a jump in global crude prices. Meanwhile, Russia’s invasion of Ukraine and tighter monetary policies globally slowed exports.
Radhika Rao, Senior Economist, DBS Bank Ltd. said, “The massive increase in the commodity bill will result in a mix of annual imports – purchase of crude oil, coal, fertilisers, edible oils.” He estimates that total imports will increase by 20%. – Accelerating export growth. “That would increase the trade trade deficit by about 40% this year.”
capital flow
Foreign investors have pulled out more than $32 billion from Indian equities in the past one year, making it the worst-performing country in Asia after Taiwan. There has also been an outflow from bonds, placing India just behind Indonesia and Malaysia.
Madhavi Arora, Principal Economist, Emkay Global Financial Services Ltd, said, “The portfolio outflows are expected to continue amid weak global equity performance and further deterioration in the balance of payments in the coming months, not mitigating the risk of underperformance of the rupee. May go.”