Goldman Sachs sees current account deficit falling to 1% of GDP this fiscal

Stating that the country's external balances are stronger than expected on the back of strong inflows, a Wall Street brokerage on Tuesday projected a much lower current account deficit which is likely to print at 1 per cent for this fiscal, leaving the balance of payment surplus at $39 billion.

Goldman Sachs in a report said the country's external balances remain favourable with a combination of low CAD, strong capital flows, adequate forex reserves and low external debt.

Combined with this, expectations for a weaker dollar due to the likely five US Fed rate cuts this year suggest a "goldilocks" environment for the country's external balances.

Accordingly, the Wall Street major has revised upwards its current account deficit (CAD) forecast to 1 per cent of GDP for FY24 from 1.3 per cent earlier, and 1.3 per cent for FY25 from 1.9 per cent earlier, citing a downward revision to their oil price forecast to $81/barrel in 2024 from above $90 earlier; and services exports continuing to surprise higher than prior expectations.

The brokerage expects robust capital flows in 2024, driven by strong equity portfolio flows as the Fed starts the easing cycle; robust debt inflows as the bonds are included in the JP Morgan's global government bond index from June 2024; and higher FDI inflows with the country continuing to benefit from regional supply chain diversification.

These capital inflows should help offset lower net corporate dollar borrowing inflows owing to sizable maturities of earlier loans coming up in 2024, it said, adding overall, the balance of payment surplus should jump to $39 billion in FY24 but fall to $27 billion in the next fiscal.

The country's oil imports fell to $164 billion in the January-November 2023 period from $189 billion a year ago as oil prices were 18 per cent lower during the period.

Similarly, services trade surplus is tracking higher as exports have surprised to the upside, driven by both business and software services.

With US growth remaining resilient, the report expects services export to remain strong and services trade balance will print in at $158 billion up from $148 billion.