India: BoP outlook clouded by uncertainty – Standard Chartered

Kanika Pasricha, Economist at Standard Chartered, suggests that they have sharply lowered their balance-of-payments projection for FY19 (ending March 2019) to a deficit of USD 15bn from a surplus of USD 10bn.

Key Quotes

“We now expect a slightly wider FY19 current account deficit of USD 74bn (2.7% of GDP) versus USD 70bn (2.5%) previously; the FY18 deficit was USD 48bn (1.9%). Financing the widening C/A deficit will be challenging.”

“The weak global funding environment has led to FPI outflows – the key reason for the revision of our BoP projections. Domestic political uncertainty, narrowing India-US rate differentials and higher oil prices are likely to pressure capital flows in FY19.”

“Q1-FY19 likely saw a BoP deficit of c.USD 10bn. We expect the quarterly C/A deficit to have widened to c.USD 17bn, the highest since Q1-FY14; we estimate that this was driven by higher oil prices, seasonal gold demand, and a persistent rise in non-oil, non-gold imports.”

“We see three key risks to our BoP projection: (1) global investor risk appetite, which is a key determinant of FPI flows; (2) oil prices – we assume an average Indian crude basket (ICB) price of USD 71/bbl in FY19; a USD 10/bbl change in ICB versus our baseline view would alter our C/A deficit projection by USD 14 bn (0.5% of GDP, after adjusting GDP for recent exchange rate weakness); and (3) the non-oil, non-gold trade deficit – recent trends are not encouraging and need to be watched closely.”