Balance of Payments - FDI inflows at all-time high: Anand Rathi Financial Sercices

India's current-account deficit in Q4 FY15 hit a low of $1.5bn as the merchandise deficit slipped. Soft crude-oil prices helped keep the import bill low. FY15 CAD is at a six-year low. The capital-account surplus touched $31bn last quarter, buoyed by FDI and portfolio investment. This too was at a seven-year high. The global liquidity overhang and good India growth prospects would continue to attract foreign inflows. The good figure is likely to ease downward pressure on the rupee.

Performance: The Q4 FY15 CAD eased to $1.5bn (0.3% of GDP), less than Q3 FY15?s $8.4bn. While the merchandise trade deficit narrowed to $32bn (vs. $39.3bn), the invisibles surplus slipped marginally to $30.2bn (vs. $30.9bn). The capital account, on the other hand, improved from the previous quarter to $30.7bn (5.8% of GDP) against $23.6bn. In the last quarter portfolio investment doubled to $12.5bn (vs. $6.3bn); FDI investment rose to $9.6bn (vs. $7.2bn). India?s addition to foreign-exchange reserves trebled to $30.1bn in the quarter. The figures for FY15 (vs. FY14) are CAD at $27.9bn (vs. 32.4bn), capital-account surplus at $90bn (vs. 48.8bn) and forex addition $61.4bn (vs. $15.5bn).

Assessment: The fall in CAD was largely brought about by the drop in the merchandise trade deficit. Crude prices averaged $52.8/barrel last quarter, helping lower the trade deficit. The invisibles surplus slipped marginally, and a small improvement was noted in private transfers and software services. Foreign investment, both FDI and portfolio investment, improved last quarter. FDI inflows touched an all-time high this quarter, portfolio investment, the volatile component, also doubled from the last quarter. The addition to forex reserves also touched an all-time high this quarter.

Outlook: In the last two years the CAD has improved considerably. Ahead, while import growth would put some pressure on the trade deficit (as growth picks up), we see some widening from current levels. Nevertheless, the CAD would broadly be around 2% of GDP. We see some slowdown in the capital account from the high of FY15. However, the Fed?s interest-rate hike uncertainty, flush global liquidity, greater growth potential in India than in EMs, all make India a favourite destination for foreign liquidity.

Recommendation: With no surprise in the BOP data, markets are unlikely to react. However, sustainability in the external balances would provide a sense of comfort. Foreign inflows are likely to continue in FY16 (due to the overhang of global liquidity and European markets offering only negative yields). The downward pressure on the rupee is likely to be reduced in the short term. We see the depreciation bias in the rupee to continue (though not beyond 65) before appreciating in H2 FY16.

Source : Equity Bulls

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