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India Macro Watch
BoP: Risks overdone, period
US$15.8bn September 10 current account deficit
Actual: US$15.8bn
Previous: US$12.1bn
Consensus: US$15.5bn
Bottom line: BoP risks overdone…
„ The good news? Incoming data support our standing call of balance of
payments risks overdone. The current account deficit, at US$15.8bn during
the September quarter, remains on track to a fundable current account deficit
of 3.5% of GDP. The concerning? A relatively high current account deficit is
eroding fx reserves at the margin to 2.3x of short-term external debt from 2.6x
as on March 2008. Nonetheless, they remain double the 1x prescribed by the
Greenspan-Guidotti rule. And the disappointing? Non-software services
exports are yet to recover from the 2008 credit shock. Note our fx strategists
continue to expect the INR to appreciate to Rs43/USD by March 11. It,
however, is projected to weaken to Rs46/USD by March 12 on a stronger US
Dollar. By the way, do read our last BoP report here.
Why it matters: … current account deficit fundable
„ We continue to find periodic apocalyptic laments - as in August 06, October
08 and July 10 - about funding the difficulties about current account deficit a
bundle of internal contradictions. All we ask: if growth must inevitably widen
the current account deficit, as some argue, wont that logically attract flows
too? It is surely not a coincidence that India received substantial FII inflows in
2010. Second, if risk aversion dries up portfolio flows to EMs, wont oil also
slip? US$10/bbl swings US$8bn on the trade deficit. Finally, if a relatively
high current account deficit prevents fx intervention and tighten liquidity, won’t
the RBI OMO (buy gilts) or cut the cash reserve ratio to inject liquidity? After
all, it will surely not wait forever for the “deluge” of capital inflows. Do read our
latest rates report here.
Details: Current account deficit hiked 20bp to 3.5% of GDP
„ We have raised our FY11 current account deficit forecast by a marginal 20bp
to 3.5% of GDP after our oil analysts have recently hiked their FY11 Dated
Brent price forecast to US$82/bbl (US$84/bbl in 1Q11) from US$78/bbl).
„ Besides, we have also ha to cut our FY11 invisibles forecast to US$85bn with
non-software services still recording outflows of US$970mn in September on
top of the US$9bn in April 09 – June 10. Anecdotal evidence suggests things
are turning around. In FY10, this segment had seen a net inflow of US$6bn.
Next up in India: Rising food inflation on aseasonal rains
„ India: Inflation data (November 5), Thursday, 6 December 2010.
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