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India has sufficient forex reserves to finance the current account deficit (CAD) and intervene in the forex market to manage volatility in the Indian rupee in FY23, according to the Economic Survey.
India’s forex reserves, as on January 20, stood at $573.727 billion. The country recorded a current account deficit of 3.3 per cent of GDP in H1 FY23, on the back of a sharp increase in the merchandise trade deficit, compared to 0.2 per cent in H1:2021-22.
The survey noted that global growth has been projected to decline in 2023, and is expected to remain generally subdued in the following years as well.
“The slowing demand will likely push down global commodity prices and improve India’s CAD in FY24. However, a downside risk to the Current Account Balance stems from a swift recovery driven mainly by domestic demand and, to a lesser extent, by exports,” said the report.
Current account is the difference between the value of exports of goods and services and the value of imports of goods and services. A deficit in this account means the country is importing more goods and services than it is exporting.
The survey underscored that CAD needs to be closely monitored as the growth momentum of the current year spills over into the next.
The challenge of the depreciating rupee, although better performing than most other currencies, persists with the likelihood of further increases in policy rates by the US Fed, per the Survey.
The widening of the CAD may also continue as global commodity prices remain elevated and the growth momentum of the Indian economy remains strong, it added.
“Growth is expected to be brisk in FY24 as a vigorous credit disbursal, and capital investment cycle is expected to unfold in India with the strengthening of the balance sheets of the corporate and banking sectors,” it said.
Further support to economic growth will come from the expansion of public digital platforms and measures such as PM GatiShakti, the National Logistics Policy, and the Production-Linked Incentive schemes to boost manufacturing output.
Monetary tightening
The report noted that with monetary tightening, the US dollar has appreciated against several currencies, including the rupee.
However, the rupee has been one of the better-performing currencies worldwide, but the modest depreciation it underwent may have added to the domestic inflationary pressures besides widening the CAD.
“Global commodity prices may have eased but are still higher compared to pre-conflict levels. They have further widened the CAD, already enlarged by India’s growth momentum,” the report said.
The survey underscored that the scenario of subdued global growth presents two silver linings – oil prices will stay low, and India’s CAD will be better than currently projected. The overall external situation will remain manageable.
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