BackGoldman Sachs cuts India’s 2023 CAD estimate to 1.4% of GDP on robust remittances
The investment bank estimates net remittances at $104 billion in calendar year 2023, up from the earlier projection of $92 billion. With almost $110 billion in gross remittance receipts, 3.2% of GDP in 2022, India was one of the highest recipients of remittances globally
PremiumNew Delhi: Goldman Sachs has slashed its estimate for India’s current account deficit (CAD) for 2023 to 1.4% of GDP, significantly lower than the 2.4% of GDP seen last year. The adjustment was driven by several factors, including robust remittance inflows, strong services exports, and a projected decrease in the goods trade deficit.
The investment bank estimates net remittances at $104 billion in calendar year 2023, up from the earlier projection of $92 billion. With almost $110 billion in gross remittance receipts, 3.2% of GDP in 2022, India was one of the highest recipients of remittances globally.
“Given that a significant proportion of remittances to India flows from the Middle East oil producing countries, higher oil prices in these countries are likely to result in better economic growth leading to higher incomes for workers and hence higher remittances to India. We use change in Brent oil prices as a proxy for economic growth in the Middle East economies, while for other countries, we use the weighted average of nominal GDP growth rates of the host countries, with their respective shares in the remittance receipts to India as weights," it said.
Conversely, the depreciation of the Indian rupee exchange rate against the US dollar negatively impacts remittances.
“Given these tailwinds from our estimate of: a) higher remittance inflows, b) higher services trade surplus, and c) a lower goods trade deficit, we revise our CY23 current account deficit forecast significantly lower to $50bn or 1.4% of GDP (vs. 2.4% of GDP earlier). Despite baking in a challenging capital flow environment, we forecast the capital account surplus to offset the deficit," it added.
The report anticipates that despite improved external balances, the Indian rupee will underperform compared to its Asian peers, experiencing appreciation pressure limitations. The Reserve Bank of India (RBI) is expected to counterbalance any inflows and replenish foreign exchange (FX) reserves, while unsterilized FX market interventions could alleviate the liquidity crunch in the domestic banking system.
Additionally, the refinancing of dollar loans by Indian companies in the onshore market is likely to maintain tight domestic interest rates. Goldman Sachs retains their forecasts for the USD/INR exchange rate at 83/82/82 over the 3-month, 6-month, and 12-month horizons.
In the third quarter of calendar year 2022, India’s current account balance expanded significantly to 3.7% of GDP from 1.1% of GDP in the previous year, driven by a rise in the goods trade deficit due to increased commodity prices following the Russian invasion of Ukraine. However, aided by subsequent corrections in commodity prices, strong growth in services exports, and higher net personal remittances, the current account deficit improved to 2.2% of GDP by the fourth quarter of calendar year 2022. For the entire year, the current account deficit stood at 2.4% of GDP, even as the goods trade deficit expanded by more than 2 percentage points, offset by services exports and remittances.
Goldman Sachs had previously revised its current account deficit forecast in March, reflecting the strength of services exports and their projection of lower oil prices in 2023 compared to 2022.
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