INSUBCONTINENT EXCLUSIVE:
India's current account is likely to remain in surplus in the April-June periodIndia has accumulated the world's fifth-largest foreign
exchange reserves at more than $500 billion, making it a bright spot in an otherwise dismal economy.The reserves were bolstered by a rare
current-account surplus in the first quarter, a return of inflows into the local stock market and foreign direct investment, including into
a unit of Reliance Industries Ltd., the country's largest company by revenue
That allowed the central bank to mop up close to $25 billion in foreign exchange to add to its reserves in the quarter through June,
according to analysts such as Anubhuti Sahay, chief India economist at Standard Chartered Plc in Mumbai.A strong reserve buffer is a cushion
against market volatility, and gives foreign investors and credit rating companies added comfort that the government can meet its debt
obligations despite a deteriorating fiscal outlook and the economy's first likely contraction in more than four decades.The following five
charts take a deeper look at India's external finances:Bigger PileThe level of reserves is enough to cover 13 months of imports and is
equivalent to nearly a fifth of the country's gross domestic product
It's also the fifth-largest in the world after China, Japan, Switzerland and Russia, according to the International Monetary Fund."FX
reserves are more than sufficient on the adequacy metrics," said Samiran Chakraborty, chief India economist at Citigroup Inc
in Mumbai, noting that the last five-year average was 11-months cover
"Short-term debt would be around 20 per cent of FX reserves, and even volatile capital flows have likely dropped to below 80 per cent of
reserves," he said.Falling ImportsIndia's trade gap narrowed to a 13-year low in May, as imports declined faster than exports
While the contraction reduces the need for dollars to fund purchases for now, it does highlight a worrying trend -- that demand in the
economy has been hit hard amid one of the world's strictest pandemic lockdowns
As a growing and emerging market economy, India needs to import capital goods and machinery to keep its industrial sector humming
Cheaper oil also helped lower the import bill.On BalanceIndia's current account, the broadest measure of trade in goods and services, is
likely to remain in surplus in the April-June period, but a recovery in imports might tilt the balance for the full year."Improvement in
economic activity over next few quarters is likely to push the current account back into deficit," said Standard Chartered's Sahay
"Lower commodity prices and weak global demand are likely to negatively affect remittances inflows and services exports, weighing further on
the current account balance."Capital FlowsAfter outflows in March amid a global market sell-off, foreign investment into Indian stocks have
picked up in the past two months as risk appetite returned
In addition, inflows have increased with the sale of stakes in blue-chip companies like Reliance, which divested from its Jio digital
platform, and Kotak Mahindra Bank Ltd
Net FDI flows made up 51.7 per cent of total capital flows in the year ended March 31, according to Deutsche Bank AG."We expect similar
trend in FY21 as well, with net FDI flows likely to account for nearly 65 per cent of total capital inflows," said Kaushik Das, chief India
economist at Deutsche Bank in Mumbai.External DebtData from the central bank show India's external debt rose to $558.5 billion as of March
2020 from $474.4 billion five years ago
While the level has gone up, the ratio of foreign exchange reserves to overall debt has also risen to 85.5 per cent from 72 per cent in
2015.The level of debt that foreigners are likely to hold, including sovereign bonds, is likely to go up as India works to open its debt
The country is aiming for a 7 per cent weighting in indexes tracked by global investors, with an inclusion likely to attract billions of
dollars at a time when public finances are deteriorating."The government intends to open up more to foreign capital in the next few years as
a source of deficit financing, but foreign investors' tolerance for government debt at current levels, with a significantly larger portion
of external debt, remains to be tested," Fitch Ratings Ltd
wrote in a recent report.
