INR Expected To Undergo A Mild Depreciation In FY25

An analysis of the CAD - Q3FY24

Suman Chowdhury, Chief Economist and Head-Research, Acuité Ratings & Research:

FinTech BizNews Service    

Mumbai, April 2, 2024: Acuité Ratings & Research has come out with an important analysis of the CAD - Q3FY24.

Key Takeaways from the attached report:

1. Merchandise trade deficit widened to USD 71.6 bn in Q3 from USD 64.5 bn in Q2 FY24. This was an outcome of a combination of exports registering a 1.5%QoQ contraction, while imports expanded by 3.2%QoQ.

2. Amidst the continued sequential improvement in net capital inflows in Q3 FY24, the Balance of Payments (BoP) surplus improved to 0.7% of GDP (i.e., USD 6.0 bn) from 0.3% of GDP (i.e., USD 2.5 bn) in Q2 FY24.

3. On annualised basis, the reduction of the Current Account Deficit (CAD) has been single-handedly driven by improvement in net inflows on invisibles led by services; as the trade deficit remained little changed. This was accompanied by a moderation in net capital inflows, led by a sharp swing in ‘Other capital’ from inflow to outflows, which more than offset the upside in net Foreign Portfolio inflows.

 4. The dynamics on current and capital account continue to provide an overall sense of stability on India’s BoP. Keeping in mind the Q1-Q3 performance, amidst range-bound movement in commodity prices, strength in services exports, global support to portfolio flows and negligible impact of Red Sea tensions so far, our FY24 CAD and BoP forecast stand at USD 28 bn (0.8% of GDP) and USD 58 bn respectively.

Says Suman Chowdhury, Chief Economist and Head-Research, Acuité Ratings & Research: “While the merchandise trade deficit has seen a sequential uptick, the CAD is expected to be better than expectations and anchor around 1.0% of GDP over the next one year due to the buoyancy in services exports and importantly, the rangebound movement in commodity prices. The foreign exchange reserves stood at a robust USD 642 bn as of the middle of March buoyed by the positive accretion to reserves aggregating to USD 32.9 bn in Apr-Dec’23. Nevertheless, we expect the INR to undergo a mild depreciation in FY25 given the likely delay and the relatively moderate rate cuts in the developed nations along with RBI’s active management of the currency to keep it reasonably anchored to the real effective exchange rate.”


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