India’s CAD may widen in FY27, but capital flows may support Rupee in H2: Report

NEW DELHI: India’s current account deficit is likely to widen in FY27, with the goods deficit expected to rise to $390 billion amid strong domestic demand and elevated imports. However, the sharp turnaround in capital flows should remain supportive of the INR in H2, according to ICICI Bank.

The private lender noted in its report that India’s goods deficit widened sharply to $85.7 billion in Q1 FY27 from $68.9 billion a year ago. This increase was mainly driven by elevated oil prices and a surge in non-oil-non-gold imports. Notably, the non-oil-non-gold deficit alone increased to $55 billion in Apr-Jul FY27 from $42 billion last year.

However, despite the widening merchandise deficit, the current account deficit remained contained at $6.2 billion in Q1, compared with a surplus of $1.2 billion a year ago, supported by a 9 per cent YoY rise in services exports to $52.2 billion and a sharp 34 per cent YoY increase in remittances to $41.4 billion.

“Remittance inflows seem to be front-loaded in Apr-May when as much as $29.5 billion of inflows were seen as against $11.9 billion in June”, ICICI Bank noted.

At the same time, India’s domestic demand is also expanding, and the recent rise in imports is likely to keep the goods deficit elevated. Based on current trends, “goods deficit is estimated to increase to $390 billion in FY27”, the lender noted. “Assuming slightly lower oil prices in H2, goods deficit should be around $265bn in the remaining eight months as against $237bn last year (run-rate of $33bn versus $30bn last year),” it said.

However, FPI equity flows have reversed from $6.6 billion of outflows in the first fortnight of June to $5.4 billion of inflows since then. At the same time, debt inflows have also strengthened to $7.3 billion, supported by changes in government securities taxation and a more positive outlook for the currency.

With India’s prospective inclusion in the Bloomberg index, passive debt inflows are likely to remain strong even in FY28, as per ICICI Bank. “The biggest change in capital flows is on account of FCNR inflows which have increased to $52.3bn as of 13 August as against $36.7bn as of end July”, it stressed, adding “overall BoP surplus for the year is estimated at around ~$55bn which is positive for INR in the medium-term

Overall, as per the lender, in the longer term, the rupee outlook will depend on Asian currencies and capital inflows. However, renewed pressure on Asian currencies could create a depreciation bias for the Indian currency. (ANI)