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India's Green Shoots Still Alive and Well

Ashish Advani (July 3, 2009)

Friday, July 3, 2009

By Ashish Advani Let’s just say, there is PLENTY to love about my home country this year. Here’s a snippet from the latest trade data coming out of India.

While we are seeing explosive Twin Deficits (Trade and Current Account) in the U.S., there are strong rays of hope coming out of the Indian economy.

Now of course, the Indian Economy is nowhere near as big as the U.S. economy. But still that doesn’t diminish the fact that India is growing at a rapid clip and remains in the top 10 economies of the world.

The current account balance swung into a surplus of 1.7% of GDP in the January-March quarter from a deficit of 4.5% of GDP in the previous quarter. The trade deficit also narrowed significantly with imports falling more than exports.

On the FX Reserve front, we have another budding and growing trend. The main sources of inflow of FX reserves for India are coming from Foreign Direct Investments (FDI) and Non Resident Indians (NRI) who live overseas remitting their earnings back to India.

Foreign direct investments (FDI) and non-resident Indian (NRI) deposits increased in May but were offset by banking capital outflows. Net FDI increased to $3.2 billion in the quarter from $0.4 billion in the previous quarter. Net NRI deposits increased due to the increase in Domestic Deposit Interest Rates.

The basic balance of payments (BBOP) swung to a surplus of 1.9% of GDP in the fourth quarter versus a deficit of 6.4% of GDP in the previous quarter indicating narrowing trade deficits and an increase in FX inflows.

In the Financial Year 2009, the current account deficit was 2.6% of GDP, while the capital account showed a small surplus of 0.8% of GDP.

Meanwhile, foreign exchange reserves fell by $58 billion. (Of that $58 billion, only $38 Billion was accounted for due to the last fall’s U.S. dollar rally. As the U.S. dollar falls again, the reserves will shoot up again).

I expect the rupee (INR) to continue to strengthen. The 2009 current account deficit of 2.6% of GDP was lower than market expectations of 3.5% of GDP, due to the rapid fall in imports in the January-March quarter. The data supports my view that the rupee will strengthen in the near term.

My six, and 12-month USD/INR targets are 45.7 and 44.0 (Spot is around 48.00 now).

Stay Long Indian Rupee!

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