Fitch reports India’s current account deficit in FY23 to reach 3.4% of GDP

India’s external buffers appear sufficient to cushion risks associated with rapid US monetary policy tightening and high global commodity prices, according to Fitch Ratings, which recently forecast India’s current account deficit in fiscal 2022-23 will reach 3.4% of the gross domestic product from 1.2% in FY22.

Imports have surged on strong domestic demand growth and high oil and coal prices. Meanwhile, export growth has moderated from the fast pace seen in January-June 2022, amid declines in prices for steel, iron ore and agricultural products.

Recessions in key European and US export marketswill weigh on near-term export prospects. However, Fitch forecasts the current-account deficit to narrow in FY24, to 2 per cent of GDP, as easing global energy prices will also dampen imports, Fitch noted.

Though external finances are becoming less of a strength in India’s credit profile, the rating agency expects foreign exchange reserves to remain robust and India’s current-account deficit to be contained at a sustainable level.

Moreover, public finances remain the key driver of the rating and are only modestly affected by these developments, particularly as India is relatively insulated from global volatility due to the sovereign’s limited reliance on external financing.

India’s foreign reserves fell by almost $101 billion in January-September 2022, but are still large at around $533 billion. The decline has reversed much of the reserve accumulation that occurred during the pandemic, and reflects valuation effects, a widening current-account deficit and some intervention by the Reserve Bank of India to support the Indian rupee’s exchange rate, Fitch noted in a press release.

RBI has attributed about two-thirds of the decline to valuation effects.

Reserve cover remains strong at about 8.9 months of imports in September. This is higher than during the ‘taper tantrum’ in 2013, when it stood at about 6.5 months, and offers the authorities scope to utilise reserves to smooth periods of external stress.

Gross external debt stood at 18.6% of GDP in the second quarter this year, which is low compared with the median of 72% for ‘BBB’ rated sovereigns in 2021.

Sovereign exposures are small, with only about 4% of GDP in primarily multilateral financing. Foreign investor holdings of domestic sovereign debt represent under 2% of the total, reducing risk of spillovers to the wider market should they seek to reduce their exposure.