India Insight:Current account deficit remains stable in June quarter

CAD stood at US$0.3bn in Jun-16 quarter: India’s current account balanceremained in deficit of US$0.3bn (0.1% of GDP annualised) in the Jun-16quarter. This was broadly in line with our expectation but below the marketexpectation of a surplus of US$2.7bn. This compared with a deficit ofUS$0.3bn and US$7.1bn registered in the previous two quarters. On a trailingfour-quarter basis, CAD narrowed to 0.8% of GDP as of the Jun-16 quarter vs1.1% of GDP registered in the previous three quarters.

Current account deficit (CAD) to remain manageable: Despite building insluggish exports and slowing remittances (link), we still expect India’s CAD toremain manageable at ~0.8% of GDP in FY17, as imports will also remaincontained on sluggish global commodity prices (barring gold), still-weakdomestic demand and a delayed growth recovery. Note we have assumed (a)global crude oil prices to average ~US$50/bbl in FY17 and (b) gold imports toremain reasonable on contained inflation and positive real deposit ratesavailable to households to arrive at these forecasts. To be sure, we have builtin some pick-up in gold imports over the coming months on festive seasondemand. While narrowing CAD has lessened India’s external capitalrequirement, we believe policymakers should continue to focus on increasingthe share of stable and non-debt-creating FDI flows in total capital flows tohelp increase the productive capacity of the economy.

Rupee (USD/INR) to remain range-bound in FY17: We expect USD/INR toaverage ~68 in FY17 and trade in the range of 66.5–68.5 over the next fewmonths. We believe India’s macro fundamentals remain strong and the likelypath of USD/INR will be more driven by external than internal factors,including the pace and timing of Fed normalising interest rates, movement inglobal crude oil prices and domestic reform momentum.