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Higher-than-expected current account surplus in 1QFY22

Expect only a mild deficit of 0.1-0.2% of GDP in FY22E

* India’s current account reported a surplus of USD6.5b (0.9% of GDP) in 1QFY22 from a deficit of USD8.1b (or 1% of GDP) in 4QFY21. This was higher than our expectation of USD1b and Bloomberg consensus of USD2b, due to a higher surplus in the invisibles account (at USD37.2b in 1QFY22 v/s USD33.6b in 4QFY21 and our forecast of USD31.9b in 1QFY22).

* Lower merchandise trade deficit drove higher current account surplus. It reduced to USD30.7b (or 4.4% of GDP) in 1QFY22 as against USD41.7b (or 5.4% of GDP) in 4QFY21. Additionally, net receipts from services increased on the back of higher net exports of telecom, computer, and information services. Surplus in the income account too increased in 1QFY22. As deficit in petroleum account reduced in 1QFY22 v/s 4QFY21, current account surplus, excluding petroleum products, stood at USD24.6b (or 3.5% of GDP) in 1QFY22 v/s USD12.2b (1.6% of GDP) in 4QFY21.

* Net foreign capital inflows rose to USD25.7b (or 3.7% of GDP) in 1QFY22 as against USD12.2b (or 1.6% of GDP) in 4QFY21, driven by huge net Foreign Direct Investment (FDI) inflows to the tune of USD11.9b in 1QFY22 from USD2.7b in 4QFY21. Net Foreign Portfolio Investment (FPI) inflows, however, reduced to a mere USD0.4b in 1QFY22 as against USD7.3b in 4QFY21 and USD0.6b in 1QFY21. As a result of high capital inflows, India saw net forex reserve (FXR) accretion of USD31.9b in 1QFY22, way higher than the USD3.4b accretion seen in 4QFY21 and USD19.8b seen in 1QFY21.

* Even as India’s current account exhibited a surplus of 0.9% of GDP, investments actually moderated to 28.7% of GDP in 1QFY22. Therefore, implied Gross Domestic Savings (GDS) stood at 29.6% of GDP in 1QFY22, lower than 33.2% in 4QFY21, but still higher than 25.3% in 1QFY21.

* We expect current account to report a mild deficit of 0.1-0.2% of GDP in FY22E on account of stable oil prices and moderate economic recovery. Moreover, higher FDI inflows may keep India’s overall Balance of Payment (BoP) in surplus, thus providing support to the USD:INR.

* Higher-than-expected current account surplus in 1QFY22: India’s current account reported a surplus of USD6.5b (0.9% of GDP) in 1QFY22 from a deficit of USD8.1b (or 1% of GDP) in 4QFY21. This was higher than our expectation of USD1b and Bloomberg consensus of USD2b, due to a higher surplus in the invisibles account (at USD37.2b in 1QFY22 v/s USD33.6b in 4QFY21 and our forecast of USD31.9b in 1QFY22).

* Lower merchandise trade deficit drives surplus in 1QFY22: Merchandise trade deficit reduced to USD30.7b (or 4.4% of GDP) in 1QFY22 as against USD41.7b (or 5.4% of GDP) in 4QFY21. As mentioned above, the net surplus in invisibles rose in 1QFY22 on account of higher net services and income receipts. Net receipts from services increased, both sequentially and yearly, to USD25.8 (or 3.7% of GDP) on the back of higher net exports of telecom, computer, and information services.

Surplus in the income account also increased to USD11.4b (or 1.6% of GDP) in 1QFY22. As deficit in petroleum account reduced to USD18b (2.6% of GDP) in 1QFY22 from USD20.4b (or 2.6% of GDP) in 4QFY21. Consequently, current account surplus, excluding petroleum products, stood at USD24.6b (or 3.5% of GDP) in 1QFY22 as against USD12.2b (1.6% of GDP) in 4QFY21.

* Capital inflows rose sharply in 1QFY22: Net foreign capital inflows rose to USD25.7b (or 3.7% of GDP) in 1QFY22 as against USD12.2b (or 1.6% of GDP) in 4QFY21 and USD1.4b (0.3% of GDP) in 1QFY21. This was driven by a huge net FDI inflows to the tune of USD11.9b in 1QFY22 from USD2.7b in 4QFY21 and FDI outflows of USD0.5b in 1QFY21. Net FPI inflows, however, reduced to a mere USD0.4b in 1QFY22 as against USD7.3b in 4QFY21 and USD0.6b in 1QFY21. As a result of high capital inflows, India saw net FXR accretion of USD31.9b in 1QFY22, way higher than the USD3.4b accretion seen in 4QFY21 and USD19.8b seen in 1QFY21.

* Savings came in slightly lower in 1QFY22: Even as India’s current account exhibited a surplus of 0.9% of GDP, investments, as a percentage of GDP, actually moderated to 28.7% of GDP in 1QFY22. Therefore, GDS stood at 29.6% of GDP in 1QFY22, lower than 33.2% in 4QFY21, but still higher than 25.3% in 1QFY21.

* Except current account to report mild deficit of 0.1-0.2% in FY22E: We expect current account to report a mild deficit of 0.1-0.2% of GDP in FY22E on account of stable oil prices and moderate economic recovery. Moreover, huge long-term investment inflows may keep India’s overall BoP in surplus, thus providing support to the USD:INR

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