India: A double-digit BoP surplus in FY20 – Standard Chartered

Analysts at Standard Chartered are expecting that India’s balance of payments (BoP) is likely to improve in FY20 (ends March 2020) after a muted FY19 (but still much better than our initial expectation of a sharp deficit). 

Key Quotes

“A swing in the BoP in Q4-FY19 almost eliminated the deficits of Q1-Q3. While this was partly driven by positive seasonality in the current account (C/A) deficit and foreign portfolio investment (FPI) flows in Q4 of every fiscal year, other factors boosted it significantly. Specifically, (1) weaker domestic growth and lower commodity prices reduced import demand and (2) FPI outflows reversed on growing expectations that the ruling party will be re-elected in India and the Fed’s dovish turn.”

“C/A deficit to widen only marginally in FY20. We expect the C/A deficit to widen to 2.4% of GDP in FY20 from 2.3% in FY19, on (1) a rise in oil import demand even as the average Indian crude basket (ICB) price remains unchanged at USD 70/bbl, (2) slower global growth and (3) a gradual recovery in domestic growth.” 

“FPI flows to guide the direction of the BoP. We project a BoP surplus of USD 15bn in FY20, assuming a pick-up in FPI inflows after the elections. Historically, such flows show a rising trend in election years, implying that political certainty is a key driver of flows. Dovish major central banks are also supportive of FPI flows.”

“Sustained recovery in other capital flows. We expect loans and banking capital flows to rise further assuming a stable political outcome from the elections and global rates stay low. An alternative liquidity tool introduced by the RBI – FX swap option – has attracted flows and has the potential to attract more inflows.”

“Risks to our projection are from reversal in risk sentiment, sharp moves in crude oil prices, a domestic political shock and/or a growth surprise (domestic or global).”