Goldman Sachs has lowered its projection for India’s current account deficit in 2024 to 1.3% of GDP from 1.9% earlier as the US bank expects services exports to continue surprising on the upside while crude oil prices are expected to decline, improving external balances.
“India’s external balances remain favorable with a combination of low current account deficit, strong public market capital flows, adequate FX reserves and low external debt. Combined with this, our expectations for a weaker dollar suggest a “goldilocks” environment for external balances,” Goldman Sachs economists Santanu Sengupta, Arjun Varma and Andrew Tilton wrote in a January 2 note.
The foreign bank projects crude oil prices at $81 per barrel in 2024 from above $90 per barrel earlier. Lower crude oil prices help India’s external metrics as well as contain inflation as the country is one of the largest importers of the commodity. In its October 2023 Monetary Policy Report, the Reserve Bank of India said that its assumption for crude oil prices was $85 per barrel.
India’s current account deficit printed at 2% of GDP in the previous financial year. In Jul-Sep 2023, the CAD was at 1% of GDP.
Goldman Sachs’ economists sounded optimistic on capital flows in 2024, predicting strong equity flows once the US Federal Reserve starts to cut interest rates. On the debt front, the economists estimated firm inflows as India starts being included in the JP Morgan bond index from June 2024.
FDI flows to India also stand to benefit from regional supply chain diversification, they said. Goldman Sachs’ US economics team forecasts 5 rate cuts by the Fed in 2024.
“Both debt and equity inflows have followed similar trends in 2023 — peaking in Q2 CY23 and moderating in Q3. However, both equity and debt inflows have picked up in Q4. Based on the current run rates we revise our FPI forecast higher to $28 billion v. $24 billion earlier.”
The economists pointed out that even though net foreign direct investment (FDI) inflows had turned positive in October they were still tracking materially lower in 2023 versus 2022 because of a higher cost of capital globally. Net FDI inflows turned positive at $6 billion in October after outflows worth about $300 million in Jul-Sep of 2023. Up to October 2023, FDI inflows were at $17 billion versus $36 billion the same time a year ago.
“Based on the current run rates we estimate net FDI inflows to end the year at around $19 billion,” the economists wrote.
While the rupee will continue to exhibit low volatility versus the US dollar, the economists expect the domestic currency to underperform most emerging market Asian currencies as the RBI is likely to build its foreign exchange reserves by purchasing dollars.
“We continue to expect the USD/INR to hover around 83.0-82.0 in the next 3-6 months, and then appreciate slightly to 81.0 over the next 12 months.” The rupee, which depreciated less than 1% against the US dollar in 2023, was last trading at 83.32/$1.
