India's Balance of Payments: Challenges Amid Currency Gains

Despite improvements in India's trade deficit and a stronger Rupee, challenges persist with low foreign direct investment and continued foreign portfolio outflows. ICICI Bank's report highlights a subdued capital account outlook, while noting some positive trends in services trade and remittances contributing to an improved current account deficit.

ICICI Bank Global Markets has raised concerns about India's balance of payments, despite noting improvements in the trade deficit and currency stability. The report highlights the challenges posed by subdued net foreign direct investment (FDI) and ongoing foreign portfolio investment (FPI) outflows, which continue to pose a threat to the capital account.

FDI inflows significantly dropped to just USD 1.2 billion from April to December 2024, down from USD 7.8 billion the previous year, while FPI outflows were recorded at USD 2.0 billion. However, an appreciation of trade partner currencies against the US dollar offers a promising outlook for the Indian Rupee (INR).

In a forecast, the USD/INR exchange rate is expected to range between 86.5 to 87.5 in the short term. February's trade data showed a notable narrowing of the trade deficit to a 42-month low of USD 14 billion, positively impacting the macroeconomic landscape.

Nevertheless, non-oil exports faced a contraction due to weak global demand and trade uncertainties. Concerns persist over reciprocal tariffs from the United States, posing external challenges. On a positive note, the services trade surplus has increased, which alongside stable remittances, provides a more optimistic view of the current account deficit, revised to USD 26 billion or 0.7% of GDP.

The report also indicated that the retreat of the dollar index and fiscal stimuli from Germany and China have lifted the outlook for emerging market currencies, including the Rupee.

(With inputs from agencies.)