India’s current account deficit (CAD) widened to $9.7bn (-1.1% of GDP) in 1QFY25 (2Q24) vs a surplus of $4.6bn (+0.5%) in 4QFY24 and full-year FY24 at -0.7% of GDP. The goods trade deficit weighed on the quarter’s current account, despite a surplus in the invisibles category. Latter was supported by a surplus in services (computer services, business services etc.), and improvement in overseas remittances, even as the primary income witnessed a net outgo. Despite a wider CAD, financial flows were well-buffered, with a surplus in most sub-heads, including net FDI, portfolio flows, NRI deposits, and external commercial borrowings, which resulted in a marginally positive BOP surplus of $5.2bn. Despite a wider CAD at the start of FY25, lower energy prices are expected to rein in the energy import bill, while service sector receipts persist. We maintain our full-year CAD forecast at -1.0% of GDP this year from -0.7% last year.
Portfolio inflows continue to maintain a strong streak on FYTD basis, with cumulative flows into the debt and equity markets at over $20bn by end-Sept. Despite the underperformance of domestic equities this week in midst of a portfolio readjustment on renewed optimism in China, India’s weightage in MSCI sub-indices continues to climb. The MSCI AC World IMI index has India at 2.35%, marginally better than China at 2.24%, while the weightage in the MSCI EM index is on a path of convergence. Strong inflows have, however, not translated a strong currency, as the rupee’s rally to above 83.50 was brief, before trading back around 83.70 (YTD regional underperformer). Our FX Strategist expects the broader dollar index to test crucial support levels in the quarter ahead, which might see the INR gain ground but still lag the recovery in Asian peers. Ahead of next week’s rate review, markets will keep a close eye on the announcement of new external members for the monetary policy committee.
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