Q3 FY22 BoP: Surplus on a decline

KEY TAKEAWAYS

  • India’s current account deficit widened to USD 23.0 bn in Q3 FY22 (2.7% of GDP) from a deficit of USD 9.9 bn (1.3% of GDP) in Q2 FY22.
  • This is primarily driven by an expansion of merchandise trade deficit to a record high of USD 60.4 bn in Q3 FY22 primarily led by higher imports attributable to the gradual unlocking of the economy along with festive demand. The run up seen in global commodity prices during the quarter also led imports to go up sharply during the quarter.
  • The deterioration in capital account led to a squeeze in the net balance of payments (BoP) surplus that shrunk substantially to USD 0.5 bn in Q3 FY22 from a healthy surplus of USD 31.2 bn in Q2 FY22.
  • The expansion of current account deficit is expected to persist in Q4 FY22 amidst gradual unlocking of economy and the spike in global commodity prices due to the Russia-Ukraine ongoing conflict.
  • We expect FY22 current account deficit to print at USD 50 bn (with possibility of a minor upside). With FPI selling at a record USD 15.7 bn in Q4 FY22, the BoP in the final quarter of the fiscal year is bound to turn negative.
  • For FY23, assuming an average price of Brent oil at USD 97 pb levels, we project current account deficit to widen to USD 85 bn.


Highlights of Q3 FY22

  • The deterioration in current account balance is primarily a manifestation of a wider merchandise trade deficit, from USD 44.5 bn in Q2 FY22 to a record high of USD 60.4 bn in Q3 FY22 primarily due to a sharp pickup in imports. This is attributable to the gradual unlocking of the economy further supported by festive demand along with the run up seen in global commodity prices during the quarter.
  • Meanwhile, the invisible surplus strengthened to a record high of USD 37.4 bn in Q3 FY22 from USD 34.6 bn in Q2 FY22 on the back of a healthy traction in IT exports and transfers.
  • For the first time in the post pandemic phase, foreign investment flows turned negative as portfolio outflows exceeded direct investment inflow. We also note that portfolio outflow of USD 5.8 bn (on account of repricing of taper expectations by the Fed along with Omicron related uncertainty) is the largest outflow since the beginning of the pandemic.
  • Amidst a pickup in imports, short term trade credit jumped to record high of USD 9.0 bn in Q3 FY22 from USD 2.4 bn in Q2 FY22.
  • Bank capital printed a healthy inflow of USD 8.2 bn in Q3 FY22 from a meagre USD 0.4 bn in Q2 FY22.

Outlook

The expansion of India’s current account deficit is expected to persist in Q4 FY22 amidst gradual unlocking of the economy and the spike in global commodity prices due to the ongoing geopolitical conflict involving Russia and Ukraine. As such, we continue to expect FY22 current account deficit to print USD 50 bn (with possibility of a minor upside). With FPI selling of USD 15.7 bn during Q4 FY22 (resulting in a record outflow), the BoP in the final quarter of the fiscal year is bound to turn negative.

For FY23, assuming an average price of Brent oil at USD 97 pb levels in the base case scenario (average of monthly future prices for the next 12 contracts), we project current account deficit to widen to USD 85 bn. The expectation of a wider current account deficit not just rests upon the likelihood of elevated global commodity prices, but is also contingent upon the following factors playing a role:

  • Unlocking of the economy post the receding of Omicron wave will once again revive pent-up demand (most states are expected to completely do away with all lockdown restrictions from Apr-22 onwards).
  • Improving vaccination cover including vaccination for non-adults (60% of the population has so far received two doses) will limit future Covid led economy disruptions and also aid organic recovery, which continues to find support from accommodative monetary policy and capex focused fiscal policy.
  • While PLIs would start accreting to export buoyancy in a gradual manner from FY23 onwards, we also need to be cognizant of continued supply side disruption due to Covid (of late there is resurgence in infections in South Korea, Vietnam, Japan, China, Germany, etc.) as also on account of the Russia-Ukraine conflict.
  • The pressure on trade deficit is increasing at a time when portfolio outflows have remained persistent since Oct-21. Elevated domestic equity valuations vis-à-vis peers, surge in global commodity prices on account of geopolitical conflict, aggressive normalization of US monetary policy, and lack of any firm commitment from the FY23 Union Budget with respect to India’s inclusion in global bond indices could keep portfolio flows subdued in the near term.

As such, we expect FY23 BoP to register a moderate deficit of USD 8 bn as against an healthy overall surplus in FY22.

Table 1: Key items within India’s BoP

Highlights of India's balance of payments (USD bn)
 
 Q3 FY21    		  
 Q4 FY21    		  
 Q1 FY22    		  
 Q2 FY22    		  
 Q3 FY22    
Merchandise Trade Balance -34.6 -41.7 -30.7 -44.5 -60.4
     Exports 77.2 91.3 97.4 104.8 109.0
      Imports 111.8 133.0 128.2 149.3 169.4
Invisibles 32.4 33.6 37.1 34.6 37.4
     Services 23.2 23.5 25.8 25.6 27.8
Transfers 19.3 18.8 19.0 19.0 21.3
Income -10.1 -8.7 -7.7 -10.0 -11.7
Current Account -2.2 -8.2 6.4 -9.9 -23.0
Foreign Investment 38.6 10.0 12.2 13.4 -0.7
     Direct 17.4 2.7 11.8 9.6 5.1
Portfolio 21.2 7.3 0.4 3.9 -5.8
Loans 0.3 7.7 2.8 7.8 10.2
of which, ECBs -1.1 6.1 0.6 4.3 -0.1
of which, Short Term Credit 0.2 -2.3 1.9 2.4 9.0
Banking Capital -7.6 -4.4 4.1 0.4 8.2
    of which, NRI Deposits 3.0 -0.5 2.5 -0.8 1.3
Others 2.8 -1.0 6.5 18.8 5.5
Capital Account 34.1 12.3 25.7 40.4 23.2
Errors & Omissions 0.6 -0.7 -0.2 0.7 0.3
Net BoP 32.5 3.4 31.9 31.2 0.5