Swelling of India’s foreign exchange reserves in combination with benign oil prices and tepid imports have led to a current account surplus and helped the Indian rupee to remain broadly stable since mid-March, India Ratings and Research (Ind-Ra) said on Thursday.
This has been despite a deterioration in some other macro parameters like retail inflation, fiscal deficits and negative GDP growth. Ind-Ra estimates the average value of rupee to be 75.98 per US dollar in FY21 as compared to 70.88 in the previous year.
A rise in global uncertainty or geopolitical tensions often leads to the capital seeking a flight to safety, thereby foreign portfolio investments leaving the shores of emerging markets.
COVID-19 also triggered this behaviour and India witnessed a foreign portfolio investment outflow of 16.05 billion dollars in March and 1.97 billion dollars in April and May.
However, said Ind-Ra, unlike the episode of taper tantrum of 2013, the impact of foreign investors pulling their money out of India did not lead to any macroeconomic instability.
Interestingly, foreign exchange reserves increased to 517.64 billion dollars (foreign currency assets: 477.81 billion dollars) on July 17 from 476.88 billion dollars in March-end.
The surplus in services trade averaged 76.49 billion dollars during FY16 to FY20. Due to COVID-19 pandemic, the revenue growth expectations of leading Indian software companies are flat to a low single-digit for FY21.
Ind-Ra expects trade in services to decline 14 per cent year-on-year in FY21 73 billion dollars.
Transfers or remittances is another big component of invisibles and averaged 65.24 billion dollars during FY16 to FY20. Ind-Ra expects net transfers to decline 25 per cent year-on-year in FY21 to 57.2 billion dollars.
According to the World Bank, remittance flows in 2020 are projected to decline across all regions in the world.
India witnessed a surplus on current account in Q4 FY20 after a gap of 51 quarters. The last time India had witnessed a current account surplus was in Q4 FY07.
Ind-Ra expects a current account surplus even in Q1 FY21 as trade deficit declined to 9.12 billion dollars and surplus in services trade during April and May was 13.98 billion dollars.
However, Ind-Ra estimates the current account to be in a deficit of 0.1 per cent of GDP in FY21 which will be the lowest current account deficit in the last 16 years.