External position looks secure - Capital Economics
India Economics

External position looks secure

India Economics Update
Written by Darren Aw
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The narrowing in India’s goods trade deficit in January is likely to soon reverse as the recovery in domestic demand and oil prices pushes up imports. But while this means that India’s recent current account surplus is unlikely to last for long, we still expect further small gains in the rupee against the US dollar over the coming years.

  • The narrowing in India’s goods trade deficit in January is likely to soon reverse as the recovery in domestic demand and oil prices pushes up imports. But while this means that India’s recent current account surplus is unlikely to last for long, we still expect further small gains in the rupee against the US dollar over the coming years.
  • India’s goods trade deficit narrowed a touch from $15.4bn in December to $14.5bn in January. (See Chart 1.) We think this will prove temporary and expect it to resume widening over the coming months.
  • Admittedly, exports will remain supported by unprecedented global demand for vaccines over the coming quarters. After all, India is home to the world’s largest producer (the Serum Institute). But exports more broadly are unlikely to receive a substantial lift even as the global economic recovery continues, given that they have already rebounded back to near pre-virus levels. (See Chart 2.) Note that good exports rose by 6.2% y/y in January, the strongest y/y gain in two years.
  • Meanwhile, the recovery in goods imports looks set to gather pace. For a start, we think the rebound in global oil prices still has further to run given the stronger outlook for oil demand. We now expect the price of Brent crude oil to rise to $70pb by the end of this year, from around $63pb currently. Consequently, the dip in oil imports in January should prove temporary. (See Chart 3.) In addition, domestic demand is likely to continue picking up, particularly as fiscal policy has turned more supportive.
  • If we are right in expecting the trade deficit to widen further ahead, India’s current account surplus is likely to tip back into a small deficit of around 1.0% of GDP in 2021, and 1.5% of GDP in 2022. (See Chart 4.) That shouldn’t spell trouble for India’s capital inflows given the backdrop of improving global risk appetite. Indeed, it’s likely that the RBI will continue making FX purchases to take some appreciation pressure off the rupee.
  • Bringing all of this together, we expect the rupee to make small gains against the US dollar over the coming years, from around 73/$ currently to 72/$ by the end of 2022.

Chart 1: Goods Trade Balance (US$bn)

Chart 2: Goods Exports (US$, S.adj, 2017 = 100)

Chart 3: Oil Prices and Imports

Chart 4: Current Account Balance (% of GDP, 4Q Sum)

Sources: CEIC, Capital Economics


Darren Aw, Asia Economist, darren.aw@capitaleconomics.com