India’s Dec23 quarter current account clocked a deficit of $10.5bn (-1.2% of GDP), narrower than a quarter as well as year ago. This took the deficit (CAD) in the first three quarters of FY24 i.e., Apr-Dec23 to 1.2% of GDP vs 2.6% year before owing to a narrower goods trade gap and record high service receipts. Resilience in remittances offset an increase in income outflows. On the financing end, net FDI narrowed to $8.5bn in Apr-Dec23 (vs $21.6bn year ago) but was accompanied by a strong rebound in portfolio flows at $32.7bn (vs -$3.5bn year ago), which resulted in an accretion of $32.9bn to the FX reserves i.e., on a BoP basis that excludes valuation effects. The run-rate for 1Q-3QFY24 and likelihood of a narrower trade (goods and services) deficit in 4Q backs our expectation that full-year FY24 CAD has room to ease below -1.0% of GDP. This along with a spike in foreign reserves to a record high above $640bn last week, reinforces the economy’s improving external position (India: Favourable current account cues).
The Indian rupee meanwhile had a mood of its own, notwithstanding improving external stability metrics, as the currency fell to a record low past 83.40 late last week, before settling around 83.30 yesterday. A combination of dollar index strength, end-month onshore dollar demand, swing in the CNY, jump in Brent prices and absence of strong intervention presence added to the INR’s depreciating bias, shaking complacency. Persistent intervention in the past few months had strongly dampened the currency’s volatility, with the Friday’s move pushing up 1M vols in its wake. Low vols due to active official presence runs parallel to the push for adequate risk management measures (including hedging). Exporters demand and stepped-up intervention is expected to keep the currency in the 83.20-83.40 band in this holiday shortened week, retaining its position as a relative outperformer vs regional peers on YTD basis. On the bonds end, rangebound UST yields and a sharp increase in SDL supply to INR1.3trn marked a floor for 10Y yield at 7.05%, while short tenor operations kept liquidity in small surplus. The borrowing calendar for first half of FY25 is due this week, with our trading desk expecting an increase in the share of securities above the 10Y tenor. We published a primer on the onshore markets - India: Onshore bond and FX markets Primer (Update).
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