Robust domestic fundamentals and global macro landscape supportive of a stronger rupee: BoB report

Robust domestic fundamentals and the global macro landscape are supportive of a stronger rupee, according to a report by Bank of Baroda’s economic research department.

“Despite mixed macro readings, the US economy is in better shape than what was estimated at the beginning of the year.

“This suggests that a Fed rate cut is just lurking around the corner and by market estimates, a June 2024 rate cut is most likely. This will provide further impetus to rupee,” BoB Economist Aditi Gupta said in a report.

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She opined that further tailwinds for the rupee will come from benign oil prices.

“Despite the war in eastern Europe as well as Middle East, oil prices have not increased materially. Though there has been some upward momentum lately, it is highly unlikely that international crude prices could rise to the levels seen during the Russia-Ukraine war. Further, at $636 billion, RBI’s foreign exchange reserves will provide the necessary cushion to cover against any adverse external shock,” Gupta said.

Overall, the BoB economist expects rupee to trade with an appreciating bias and estimates a range of 82.75-83.00 per dollar in the near term.

CAD to moderate below 1%

Gupta noted that trade deficit in FYTD24 (April 2023-February 2024) is tracking lower at $225.2 billion compared with $ 245.9 billion in the same period last year. This is because imports have fallen at a faster rate than exports.

Apart from this, despite headwinds, net services receipts have been much higher at $315 billion this year, compared with $ 294.9 billion in April 2022-February 2023.

“A lower merchandise deficit along with higher services receipts is likely to push CAD (current account deficit) lower than last year. We expect India’s CAD to moderate to below 1 per cent of GDP in FY24, which is lower than our earlier estimates of CAD between 1.2-1.5 per cent of GDP,” the BoB economist said.

Funding side positive

Gupta observed that on the funding side, capital account picture also looks positive.

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“While FDI (foreign direct investment) inflows have been nascent this year, it has been compensated by buoyant foreign portfolio investment (FPI) inflows as well as external commercial borrowings (ECBs).

“Net FDI inflows into India are trailing at just $9.7 billion in the first three-quarters of the year, compared with $21.6 billion during the same period last year,” she said.

FPI inflows buoyant

On the other hand, FPI inflows into India have been buoyant, led by both equity and debt inflows. Up to 15 March 2024, India has received inflows of $40.9 billion.

Gupta underscored that segment wise, equity inflows have dominated at $25.9 billion, inflows into debt have been steadily rising this year and stand at $14.2 billion so far.

She opined that India’s inclusion into JP Morgan’s bond index (scheduled to start from June 2024) and Bloomberg EM Local Currency Index (scheduled to start from January 2025) has buoyed foreign investors’ interest in the domestic bond market.

This can be gauged from the fact that debt utilisation by FPIs in some FAR (fully accessible route) securities has increased to over 10 per cent.

In fact, a total of 4 securities out of the total 35 FAR securities have debt utilisation of over 10 per cent. Compared with this, as on 31 March 2023, the maximum debt utilisation in a single FAR security stood at only 5.39 per cent.

ECB & NRI deposits

ECB approvals also have been much higher than last year. ECB approvals by RBI have surged to $38.7 billion in FYTD24 (April 2023-January 2024) compared with $21.2 billion in the same period last year, per the BoB report.

NRI deposits too have shown momentum and are likely to contribute positively to the capital account.

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