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Current account sees another deficit in 4QFY21…

…but posts a surplus of 0.9% of GDP in FY21

* India’s current account deficit (CAD) came in at USD8.1b (or 1% of GDP) in 4Q, from a minor deficit of USD2.2b (or 0.3% of GDP) in 3QFY21. This figure in 4QFY21 was in line with our estimates, but slightly higher than Bloomberg consensus of USD7.5b. With this, India’s current account balance stood at a surplus of USD24b (or 0.9% of GDP in FY21) on account of surpluses reported in the first half. Higher merchandise trade deficit was the driver of CAD in 4QFY21. The same stood at 5.4% of GDP in 4Q vis-à-vis 4.7% of GDP in 3QFY21. Moreover, the surplus in the invisibles (services + income) account was at a 14-quarter low of 4.3% of GDP in 4QFY21.

* Net foreign capital inflows amounted to USD12.2b in 4Q, drastically lower than USD34.1b in 3QFY21 and USD17.3b in 4QFY20. It stood at a three-quarter low of 1.6% of GDP in 4QFY21. This was on account of a moderation in both foreign direct and portfolio investment inflows, which weakened to USD2.7b/USD7.3b in 4Q v/s USD17.4b/USD21.2b in 3QFY21. Capital account surplus for FY21 stood lower at USD62.6b (or 2.4% of GDP) as against USD83.1b (or 2.9% of GDP) in 3Q.

* Due to the sharp moderation in foreign capital inflows, India added USD3.4b in foreign exchange reserves (FXR) in 4Q, lower than the accretion of USD32.5b seen in 3QFY21.

* With an impressive uptick in investments to 34.3% of GDP and a small CAD of 1% of GDP, Gross Domestic Savings (GDS) stood at 33.2% of GDP in 4QFY21. For FY21, GDS rose marginally to 30.2% of GDP, higher than 29.8% of GDP in FY20.

* As economic activity normalizes, India would likely move back into CAD territory. We estimate a CAD of 0.2% of GDP in FY22E.

* Current account posts second consecutive deficit in 4QFY21: India’s CAD came in at USD8.1b (or 1% of GDP) in 4Q, from a minor deficit of USD2.2b (or 0.3% of GDP) in 3QFY21 and a surplus of USD631m (or 0.1% of GDP) in 4QFY20 (Exhibit 1). The CAD figure in 4QFY21 was in line with our estimates, but slightly higher than Bloomberg consensus of USD7.5b. With this, India’s current account balance stood at a surplus of USD24b (or 0.9% of GDP in FY21) on account of surpluses reported in the first half (Exhibit 2).

* Merchandise trade deficit drives CAD in 4QFY21: Merchandise trade deficit stood at 5.4% of GDP in 4Q vis-à-vis 4.7% of GDP in 3QFY21 and 4.9% of GDP in 4QFY20 (Exhibit 3). For FY21, the same stood lower at 3.8% of GDP (due to relatively lower trade deficits reported in 1H) as compared with 5.5% of GDP in FY20 (Exhibit 4). The higher trade deficit in 4Q was broad-based, with a deficit of 2.6% of GDP in the petroleum account (v/s a lower deficit of 2.2% of GDP in 3QFY21).

Current Account Balance, excluding petroleum, stood at a surplus of USD12.2b (or 1.6% of GDP) in 4Q, slightly lower than a surplus of USD14.1b (or 1.9% of GDP) in 3QFY21. The surplus in the invisibles (services + income) account was at a 14-quarter low of 4.3% of GDP – as imports of invisibles rose 7.8% YoY, while exports increased at a much slower pace of 1.8% in 4QFY21.

* Capital inflows moderated sharply in 4QFY21: Net foreign capital inflows amounted to USD12.2b in 4Q, drastically lower than USD34.1b in 3QFY21 and USD17.3b in 4QFY20. It stood at a three-quarter low of 1.6% of GDP in 4QFY21. This was on account of a moderation in both foreign direct and portfolio investment inflows, which weakened to USD2.7b/USD7.3b in 4Q v/s USD17.4b/USD21.2b in 3QFY21. As a percentage of GDP, FPI inflows were 0.9% in 4Q – lower than 2.9% of GDP in 3QFY21. FDI inflows, as a percentage of GSD, stood at 0.3% of GDP vis-à-vis 2.4% of GDP in 3QFY21 (Exhibit 5). Capital account surplus for FY21 stood lower at USD62.6b (or 2.4% of GDP) as against USD83.1b (or 2.9% of GDP) in 3Q.

* Savings at a 25-quarter high in 4QFY21: With an impressive uptick in investments to 34.3% of GDP and a small CAD of 1% of GDP, GDS stood at 33.2% of GDP in 4QFY21 (Exhibit 6). For FY21, GDS rose marginally to 30.2% of GDP, higher than 29.8% of GDP in FY20.

* Except current account to report a marginal deficit in FY22: As economic activity normalizes, India would likely move back into CAD territory. We estimate a CAD of 0.2% of GDP in FY22E.

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