Economy: Lower trade deficit and FPI flows buoy BOP - Kotak

Lower trade deficit and FPI flows buoy BOP. 4QFY17 CAD/GDP improved from 3QFY17 on the back of lower trade deficit. Capital account flows were buoyed by FPI investments even as banking capital reverted gains seen in 3QFY17. FY2017 CAD/GDP was at 0.7% with BOP at US$21.6 bn. We estimate FY2018 CAD/GDP at 1.5% (marginally higher than our earlier estimate of 1.3%) incorporating the trends in merchandise trade and average crude price of US$60/bbl.

4QFY17 and FY2017 CAD improves on lower trade deficit

4QFY17 CAD improved to US$3.5 bn (0.6% of GDP), compared to US$8 bn (1.4% of GDP) in 3QFY17 (Exhibit 1). Trade deficit was at US$29.7 bn (US$33.3 bn in 3QFY17; US$24.8 bn in 4QFY16). Non-oil imports increased to US$85 bn (3QFY17 at US$80 bn) on the back of high gold imports at US$9.7 bn (3QFY17 at US$9.8 bn) Growth in exports was at 17.5% in 4QFY17 after 5.9% in 3QFY17 with non-oil exports growing at 15.9% in 4QFY17 (5% in 3QFY17) aided by favorable currency and price effects.

Invisibles receipts in 4QFY17 were broadly in line with 3QFY17 at US$26.3 bn with increases in non-software services along with higher investment income (possibly on the back of higher global yields). FY2017 CAD was at US$15.3 bn (0.7% of GDP) on the back of lower trade deficit even as invisibles were lower compared to FY2016 due to lower remittances.

FPI flows help in keeping capital flows buoyant

FPI flows in 4QFY17 saw net inflows of US$10.8 bn, reversing net outflows of US$11.3 bn in 3QFY17. Net FDI inflows was at US$5 bn, lower than US$9.7 bn. Banking capital saw net outflow of US$13 bn, possibly reversing the adjustments seen in 3QFY17 due to the outflow of NRI deposits. Within banking capital, inflows of NRI deposits normalized at US$2.7 bn after a net outflow of US$18.5 bn in 3QFY17 on the back of FCNR(B) redemptions. Overall balance in 4QFY17 was at US$7.3 bn. FY2017 net capital inflows were at US$36.5 bn with FDI flows at US$35.6 bn, in line with FY2016 net inflows of US$36 bn. Overall balance in FY2017 was at US$21.6 bn on the back of an improvement in CAD.

CAD likely to deteriorate in FY2018 but strong capital flows will act as a buffer

Our FY2018 CAD estimate assumes exports growth to recover by around 8% on the back of 8% growth in non-oil exports. Signs of economic strength in US and EU along with favorable commodity prices bode well for exports through FY2018. For FY2018 we assume average crude price at US$60/bbl against US$49/bbl in FY2017. We model imports growth at 12.5% based on higher oil and gold imports compared to FY2017. We estimate FY2018 CAD/GDP to deteriorate to 1.5% (US$39.3 bn) (Exhibit 2). In case crude averages around US$50/bbl, CAD/GDP could improve to around 1%. Capital flows are likely to be supported by strong FDI and FPI flows. For FY2018, we estimate a BOP surplus of US$21.7 bn. We expect the INR to range between 63.5 and 67.5 in FY2018. Towards the latter half of FY2018, we expect some weakness in the INR coming through gradually on the back of (1) rate adjustment as well as balance sheet adjustment of the Fed, (2) policy normalization of other DM central banks and likely adjustment to DM yields, and (3) gradual narrowing of real interest rate differential between India and other DMs.

Source : Equity Bulls

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