A rise in global uncertainty or geopolitical tensions often leads to capital seeking flight to safety, thereby foreign portfolio investments leaving the shores of emerging markets. COVID-19 also triggered this behaviour, and India witnessed a foreign portfolio investment (FPI) outflow of $16.05 billion in March 2020 and $1.97 billion during April-May 2020. However, unlike the episode of taper tantrum of 2013, the impact of foreign investors pulling their money out of India did not lead to any macroeconomic instability, says a research note.
In the report, India Ratings and Research Pvt Ltd (Ind-Ra) says, "Interestingly, foreign exchange reserves increased to $517.64 billion (foreign currency assets: $477.81 billion) on 17 July 2020 from $476.88 billion ($442.21 billion) at end-March 2020. It is this swelling of foreign exchange reserves that in combination with benign oil prices and tepid imports, leading to a current account surplus, has helped the Indian rupee to remain broadly stable since mid-March 2020, despite deterioration in some of the other macro parameters such as retail inflation, fiscal deficits and negative GDP growth. Ind-Ra estimates the average value of rupee to be Rs75.98 per US dollar in FY20-21 (FY19-20: Rs70.88/US dollar).
Surplus in services trade averaged $76.489 billion during FY15-16-FY19-20.
According to the ratings agency, due to the COVID-19 pandemic, the revenue growth expectations of leading Indian software companies are flat to low single digit for FY20-21.
Ind-Ra says it expects trade in services to decline 14% in FY20-21 to $73.0 billion. "Transfers or remittances is another big component of invisibles and averaged $65.24 billion during FY15-16-FY19-20. We expect net transfers to decline 25% in FY20-21 to $57.2 billion. According to the World Bank, remittance flows in 2020 are projected to decline across all regions in the world," it added.
India witnessed a surplus on current account during fourth quarter (4Q) of FY19-20 ($558 million, 0.1% of GDP) after a gap of 51 quarters. The last time India had witnessed a current account surplus was in 4QFY06-07 ($4,223 million).
Ind-Ra says it expects a current account surplus even in 1QFY20-21, as trade deficit declined to $9.12 billion and surplus in services trade during April-May 2020 was $13.98 billion. However, Ind-Ra estimates the current account to be in deficit of 0.1% of GDP ($3.3 billion) in FY20-21, which will be the lowest current account deficit in the last 16 years.
As per the ratings agency, capital account of India has remained in surplus for most of FY2000-01-FY19-20; there have been only three instances (FY08-09, FY11-12 and FY18-19) when inflows in capital account fell short of covering the current account deficit.
It says, "Net foreign direct investments have been a major and the most stable source of inflows in the capital account. It averaged $35.13 billion as against net average portfolio inflows of $5.23 billion during FY15-16-FY19-20."
"Loans (external assistance, government borrowings and short-term credit) are estimated to increase to $25.9 billion in FY20-21. Ind-Ra expects the capital account inflows to increase to $67.3 billion in FY20-21 (FY19-20: $83.2 billion), leading to $64.0 billion increase in foreign exchange reserves," the ratings agency concludes.