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'For every rupee depreciation, software exports increase by $250 mn'
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IANS | 10 Nov, 2022
India's software export revenue and remittances act as a strong counter
cyclical buffer against increase in current account deficit (CAD) due to
hike in global oil prices and rupee depreciation, said the State Bank
of India's (SBI) Chief Economic Adviser.
In a research
report Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI, said
for every rupee depreciation, software exports increase by $250 million.
Ghosh
said contrary to the expectations, the Q1FY23 Balance of Payments (BOP)
numbers have shown that a strong counter-cyclical buffer in the form of
service exports and remittances.
For example, in Q1, India's CAD
was expected to breach $30 billion/3.8 per cent of gross domestic
product (GDP), but the actual numbers came in at 2.8 per cent of GDP.
The positive surprise was because of strong remittances and software exports, the CAD got a lift of 60 basis points, Ghosh said.
"We
expect that if such trends of strong remittances and software exports
have continued (RBI data suggests software exports in Q2 was strong) in
Q2, and India's CAD comes in below the threshold level o f 3.5 per cent
of GDP in Q2, the CAD for FY23 could still be closer to 3 per cent
benchmark and not in excess of 3.5 per cent of GDP," he added.
Also,
forex reserves could jump by another $5 billion as swap transactions
reverse and thus having a positive impact on rupee as is being currently
witnessed, he noted.
To understand the factors that are impacting India's CAD, Ghosh wor ked on the structural vector auto-regressions (SVAR) model.
With
oil forming 30 per cent of India's import bill, it has a major impact
on macro-economic variables. An increase in oil import price impacts
directly the trade deficit and consequently CAD gets widened.
That apart, it also results in inflation.
According
to Ghosh, the SVAR model introduces a counter cyclical response to
increased oil prices in the form of software service exports that is
impacted positively because of a rupee depreciation.
"Although, remittances are positively impacted, we have not conside red them in our SVAR model because of data volatility."
The
results of the SVAR model clearly gives an idea of the negative impact
of oil price shock on CAD, inflation and growth in one direction and the
positive impact of software exports on CAD as a result of rupee
depreciation.
In particular, a positive shock to oil prices leads
to immediate and sharp increase in CAD, which dissipates completely in
about eight quarters.
The trade deficit also increases up to two quarters after the initial positive oil price shock, he said.
"This
implies that India's trade deficit may already have b een adversely
impacted for first half of the current fiscal because of the oil price
shock," Ghosh said.
In case of GDP, positive shock to oil prices
leads to immediate decline, which however starts reversing after third
quarter and completely dissipates after the seventh quarter.
"This
implies that India's first half GDP growth in FY23 co uld have been
impacted because of oil price shock. Most interestingly, rupee dollar
exchange rate also gets impacted and it depreciates slightly after
increase in oil prices till three quarters following which it starts
appreciating," he said.
As a result, the rupee outlook is likely to improve in Q4 of FY23.
The
impact of oil price on consumer price index (CPI) inflation will
dissipates after four quarters and it means that the CPI inflation
outlook for FY24 will be consistent with RBI's forecast of 5 per cent.
Ghosh
said India's software exports are on the rise with the share of offsite
mode of exports by Indian IT service companies increasing to 88.8 per
cent in FY22 compared to 82.8 per cent five years ago.
Ghosh said
a $10 increase in crude oil prices leads to increase of 40 bps in CAD,
50 bps in CPI and 23 bps decline in growth with software exports acting
as counter cyclical buffer.
"The exchange rate pass through from
variance decomposition method shows it is at least 10 per cent for CAD,
inflation and growth, but significantly stronger at 35 per cent for
software exports. For every rupee depreciation, software exports
increase by $250 million," Ghosh added.
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Customs Exchange Rates |
Currency |
Import |
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84.65 |
Euro
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75.65 |
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56.85 |
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