Tuesday's Talking Points
Balance of Payments – A Key Metric to look out for!
What’s the Point?
The latest numbers of Balance of Payments (BoP) show that India’s Current Account, a key component of BoP, saw its deficit (Current Account Deficit) marginally increase to US$11.2 billion (1.2% of GDP) in Q2FY25 from US$10.2 billion in Q1FY25, despite the trade deficit widening to US$75.3 billion in Q2FY25 from US$65.3 billion in Q1FY25. This has been due to a strong growth in invisible receipts led by net services and remittances, lower crude oil imports. Capital Account, another key component of BoP, saw surplus increase to US$30.5 billion in Q2FY25 from US$14.7 billion in Q1FY25 due to higher net FPI inflows. Continued FPI outflows could drive India’s BoP from being surplus to neutral in H2FY25. With the strength of BoP holding key for India’s external sector, the Rupee and overall macroeconomic stability, it is important to see if India’s overall Balance can remain manageable.
Numbers in Perspective
Source: RBI, ICICI Bank Global Research, Centre for Monitoring Indian Economy (CMIE), Kotak Institutional Equities; *in US$ billion; Exports include Petroleum and Non-Petroleum Products; Imports include Crude Oil and Petroleum Products, Gold, and Non-Crude Oil and Petroleum Products and Non-Gold; Invisible Receipts include Services, Transfers and Investment Income; Foreign Investment includes FDI and Foreign Portfolio Investment
What has helped Current Account Deficit (CAD) remain flat?
- Lower Crude Imports: Crude Oil imports fell by 11.1% y-o-y and 27.4% q-o-q to US$37.4 billion in Q2FY25, with imports from Russia witnessing the steepest decline
- Higher Invisible Receipts: These receipts saw a 20.3% y-o-y step-up to US$64.1 billion in Q2FY25, mainly led by (a) 11.5% y-o-y growth in net services (software and business services) in Q2FY25; (b) 16.9% y-o-y growth in inward remittances to 29.1 billion during the same period, and (c) 18.1% y-o-y lower outgo on account of investment income at US$9.5 billion in Q2FY25 compared to US$11.6 billion in Q2FY24.
What has supported the Capital Account Surplus?
Capital account recorded a 138% y-o-y jump in surplus in Q2FY25 to US$30.5 billion from US$12.8 billion in Q2FY24, led by (a) 21x q-o-q increase in Foreign Portfolio Net Investments – US$19.9 billion in Q2FY25 vs US$0.9 billion in Q1FY25; (b) 1.1x q-o-q increase in Banking capital inflows – US$6.1 billion in Q2FY25 vs US$2.9 billion in Q1FY25, and (c) 27% q-o-q increase in loan disbursements – US$7.5 billion vs US$5.9 billion in Q1FY25.
Overall BoP: Sustained services exports has kept CAD well within manageable limits, and has structurally reduced India’s vulnerability to high oil prices. Higher Gold and Non-Crude Oil and Petroleum Products and Non-Gold imports outpacing exports, have kept merchandise trade deficit higher despite weaker oil prices. Exits through IPOs in 2024 and large FPI outflows in Q3FY25 have kept capital flows subdued.
Is the Potential Change in BoP from surplus to neutral a concern for India?
Current Account: As per estimates by Kotak Institutional Equities, India’s CAD could widen from 0.7% of GDP in FY24 to 1.3% of GDP in FY25 on the back of rise in protectionism and risk of escalation in trade war impacting India’s export prospects in 2025. Prima facie, while the forecasted CAD looks higher than the past few quarters, this is within the historical average of 1.2% since 1980, and lower than the long-term average of 1.7% witnessed since FY12 (Chart 1).
Furthermore, India’s CAD could see an improvement in 2 scenarios: (a) Sustained services exports; and (b) Expected softening in crude oil prices in view of rising supply and moderating global growth.
Capital Account: Total FPI outflows to the tune of US$10.9 billion in Q3FY25 and subdued FDI flows could drive the BoP from being in surplus to neutral in H2FY25.
While the Indian Rupee (INR) depreciated against the USD by just 0.88% between Sep-23 and Sep-24, it has depreciated by 2.16% in Q3FY25, breaching ₹85. Though this has raised concerns, RBI has been actively intervening by selling US$47.9 billion of its forex reserves since October 2024. This has kept INR’s depreciation in Q3FY25 much lower than other EM currencies like Chinese Renminbi, Argentinian Peso and multiple others during the same period.
For the long-term, the Government could continue focussing on import substitution by building manufacturing capabilities through initiatives like Production-Linked Incentive Scheme, PM Gati Shakti Mission, amongst multiple others, which could raise India’s exports potential, thereby keeping India’s overall balance in check.
Sources: Bloomberg, ICICI Bank Global Research, Kotak Institutional Equities, RBI, NSDL, and other publicly available information
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