Falling imports, moderate crude to help post 0.4% current account surplus, first since FY04: Study

According to the RBI, in FY04, the country logged in current account surplus at $10.6 billion which was 1.8 per cent of GDP of that year.

For the first time since FY04, the economy is set to close the current fiscal with a current account surplus of 0.4 per cent of GDP, boosted by falling imports and crude prices, and not driven by better exports, according to a report.

After many quarters, the economy logged in a marginal current account surplus in June quarter at 0.1 per cent or $600 million as against a deficit of $4.6 billion or 0.7 per cent of GDP in FY19, according to the latest Reserve Bank data.

For fiscal 2020, CAD improved to 0.9 per cent of GDP from 2.1 per cent in FY19.

“For the first time since FY04, the economy is set to register a small current account surplus of 0.4 per cent of GDP in FY21 led by weak domestic demand and lower crude prices leading to a collapse in imports rather than a strong export recovery,” Tanvee Gupta Jain, the house economist at UBS Securities India said in a note, without quantifying the surplus amount that year.

According to the RBI, in FY04, the country logged in current account surplus at $10.6 billion which was 1.8 per cent of GDP of that year.

However, she added that the surplus trend will not be sustained for long as rising crude prices, gradual recovery in domestic demand and only a modest recovery in exports will reverse the trend.

“We estimate the current account to swing to a deficit of 0.3 per cent of GDP in FY22, which is still lower than sustainable range on below trend GDP growth,” she said.

The Reserve Bank of India said the current account surplus was primarily due to a lower trade deficit which penciled in at $35 billion and a sharp rise in net invisible receipts of $35.6 billion.

Net services receipts rose to $22 billion in the quarter due to a rise in net earnings from computer and travel services, the RBI had said, adding private transfers, mainly remittances, jumped 14.8 per cent to $20.6 billion.

Jain also warned of remittances – where India is the largest recipient at $76 billion or 2.7 per cent of GDP in FY20 – plunging by 25 per cent this year.

“Going forward, the sharp fall in crude prices will affect growth of Gulf Cooperation Council, which account for around 62 per cent of remittance inflows to the country.

“According to our analysis, every 10 per cent fall in crude prices reduces remittances by 7 per cent in the long-run. Similarly, weak US economic outlook would adversely affect employment/incomes of migrants and thus remittances. Based on this, we expect private transfers to slow to $55-60 billion FY21 down 25 per cent from FY20,” Jain said.

Current account deficit excluding remittances would have been a high $101 billion or 3.5 per cent of GDP, as against $25 billion or 0.9 per cent of GDP without these transfers in FY20, she said.

Stating that the rupee is trading above the real effective exchange rate, she said it should be 69-72. A currency trades past its fair value when adjusted for productivity differential.

“Improving external position and weakening dollar have resulted in the rupee remaining largely range-bound at 74.5-77 since end-March despite the pushing the economy into the worst-ever recession.

“Looking at rupee on a real effective exchange rate basis and adjusting for the productivity differential with trading partners, the rupee is trading past its equilibrium value, and its fair value should be in the 69-72 range, if not for policy induced depreciation,” she said, adding the likely fall in FDI and other non-FDI inflows would add to the risks.

But support for the rupee is high forex reserves at over $518 billion, which is the fifth largest in the world now, offering import cover for over 15 months.

At over $518 billion the reserves cover 86 per cent of external debt, up from 68 per cent in FY14, but below 138 per cent in FY08. Import cover for reserves is over 15 months, much better than seven months in FY13 when the rupee was at its worst and for 14.4 months in FY08.