Rupee may remain stable on swelling forex reserves

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SME Times News Bureau | 30 Jul, 2020
Swelling foreign exchange reserves along with a current account surplus, has aided the Indian rupee to remain broadly stable since mid-March 2020, India Ratings and Research said on Thursday.

Accordingly, the Indian currency has remained stable despite deterioration in some of the macro parameters such as retail inflation, fiscal deficit and negative GDP growth.

The ratings agency estimates the average value of the rupee to be Rs 75.98 per USD in FY21 and expects the capital account inflows to increase to $67.3 billion in FY21, leading to a $64 billion increase in foreign exchange reserves.

"India is a net commodity importer especially due to a high oil import bill. As a result, the country's trade account is in perpetual deficit. However, a sustained surplus in services account coupled with remittances, together known as invisibles, provides adequate support to the trade deficit," the ratings agency said in a statement.

"As the FY21 growth outlook is bleak and Ind-Ra expects the economy to contract 5.3 per cent YoY in FY21, both exports and imports could decline for the second consecutive year in FY21. Therefore Ind-Ra expects trade deficit to decline to a 13-year low to $101 billion in FY21."

According to the statement, surplus in services trade averaged $76.489 billion during FY16-FY20.

"Due to the Covid-19 pandemic, the revenue growth expectations of leading Indian software companies are flat to low single digit for FY21," the statement said.

"Ind-Ra expects trade in services to decline 14 per cent YoY in FY21 to $73 billion. Transfers or remittances is another big component of invisibles and averaged $65.24 billion during FY16-FY20."

"Ind-Ra expects net transfers to decline 25 per cent YoY in FY21 to $ 57.2 billion. According to the World Bank, remittance flows in 2020 are projected to decline across all regions in the world."

As per the statement, India witnessed a surplus on current account in 4QFY20 after a gap of 51 quarters.

"The last time India had witnessed a current account surplus was in 4 QFY07. Ind-Ra expects a current account surplus even in 1QFY21, as trade deficit declined to $9.12 billion and surplus in services trade during April-May 2020 was $13.98 billion," the statement said.

"However, Ind-Ra estimates the current account to be in deficit of 0.1 per cent of GDP in FY21, which will be the lowest current account deficit in the last 16 years."

Besides, the rating agency pointed out that capital account of India has remained in surplus for most of FY01-FY20; there have been only three instances when inflows in capital account fell short of covering the current account deficit.

"Net foreign direct investments have been a major and the most stable source of inflows in the capital account. It averaged $35.13 billion as against net average portfolio inflows of $5.23 billion during FY16-FY20," the statement said.

"Loans are estimated to increase to $25.9 billion in FY21. Ind-Ra expects the capital account inflows to increase to $67.3 billion in FY21, leading to $64 billion increase in foreign exchange reserves."