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India’s external balances remain favorable with a combination of low current account deficit, strong public market capital flows, adequate FX reserves and low external debt, Goldman Sachs said in a new report.
“Combined with this, our expectations for a weaker dollar (on the back of our US economics team’s forecast for five Fed rate cuts this year) suggest a “goldilocks” environment for external balances. We revise our current account deficit forecasts to 1.0 per cent of GDP for 2023 (from 1.3 per cent of GDP earlier) and 1.3 per cent of GDP in 2024 (from 1.9 per cent of GDP earlier) on the back of a downward revision to our commodity team’s oil price forecast to $81/bbl in 2024 (from above $90/bbl earlier) and services exports continuing to surprise higher than our prior expectations,” the brokerage firm said.
“In 2024, we expect robust capital flows, driven by: robust equity portfolio flows as the Fed starts the easing cycle, robust debt inflows as India starts being included in the JPM GBIM global bond index (beginning June 2024) and FDI inflows with India continuing to benefit from regional supply chain diversification,” it added.
These capital inflows should help offset lower net corporate dollar borrowing inflows owing to sizable maturities of earlier loans coming up in 2024.
“Overall, we project balance of payment surplus of $39billion in 2023 and $27 billion in 2024,” it said
The Indian rupee is likely to appreciate 81 against the US dollar over the next 12 months amid expectations of heavy foreign capital inflows, Goldman Sachs said in a note on Tuesday.
Still, the currency will underperform its Asian peers as the Reserve Bank of India (RBI) could continue to accumulate inflows and build forex reserves “at every opportunity,”
Equity portfolio flows into India will be “robust” as the Federal Reserve starts its interest rate easing cycle in 2024, while debt inflows will be strong following India’s inclusion in the JPMorgan’s global bond indexes, Goldman Sachs added.
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