Why India is set to record balance of payments deficit this fiscal year

economy

Indian Market
by 5paisa Research Team Last Updated: 2023-01-09T16:13:36+05:30

For the first time in over two decades, India is set to post a balance of payments (BoP) deficit, a report by Standard Chartered Bank has said. 

The foreign bank expects the country to record a BoP deficit of $24 billion this fiscal year and $5.5 billion in the next, against a surplus of $47.5 billion last year.

How much does Standard Chartered expect current account balances to slip by?

The foreign bank expects current account balance to slip into a deficit of 3% of gross domestic product this financial year from a surplus of 0.9% last year, before narrowing to 2.6% in fiscal year 2023-2024.

What exactly has the bank said in its note?

"Higher commodity prices, better growth in India compared to the rest of the world, and higher global interest rates amid cautious risk appetite could keep the C/A (current account) deficit wide and contain capital inflows in FY24," Anubhuti Sahay, head of South Asia Economic Research (India) at Standard Chartered Bank, India, said in a note.

The BoP dynamics next year could be dominated by an absolute CAD financing requirement of around $100 billion, given the chances of higher global rates keeping debt-investment inflows cautious, the bank said.

The potentially improved risk appetite in the second half of the year could lead to net positive portfolio inflows, while an increased volatility in the banking capital segment may keep BoP forecasting "challenging," it added.

"While the C/A deficit may appear more manageable, it still represents a large financing requirement in absolute terms, especially given the weak global growth backdrop. Our forecast of a smaller C/A deficit/GDP ratio in FY24 assumes a narrower trade deficit, but slower software and remittance inflows contributing to a large deficit size," the foreign bank said.

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