New Delhi [India], August 18 (ANI): India's current account deficit is likely to widen in FY27, with the goods deficit expected to rise to USD 390 billion amid strong domestic demand and elevated imports. However, the sharp turnaround in capital flows should remain supportive of the INR in H2, according to ICICI Bank.

The private lender noted in its report that India's goods deficit widened sharply to USD 85.7 billion in Q1 FY27 from USD 68.9 billion a year ago. This increase was mainly driven by elevated oil prices and a surge in non-oil-non-gold imports.

Notably, the non-oil-non-gold deficit alone increased to USD 55 billion in Apr-Jul FY27 from USD 42 billion last year.

However, despite the widening merchandise deficit, the current account deficit remained contained at USD 6.2 billion in Q1, compared with a surplus of USD 1.2 billion a year ago, supported by a 9% YoY rise in services exports to USD 52.2 billion and a sharp 34% YoY increase in remittances to USD 41.4 billion.

Notably, 'Remittance inflows seem to be front-loaded in Apr-May when as much as USD 29.5 billion of inflows were seen as against USD 11.9 billion in June,' ICICI Bank noted.

At the same time, India's domestic demand is also expanding, and the recent rise in imports is likely to keep the goods deficit elevated. Based on current trends, 'goods deficit is estimated to increase to USD 390 billion in FY27,' the lender noted.

'Assuming slightly lower oil prices in H2, goods deficit should be around USD 265bn in the remaining eight months as against USD 237bn last year (run-rate of USD 33bn versus USD 30bn last year),' it said.

However, FPI equity flows have reversed from USD 6.6 billion of outflows in the first fortnight of June to USD 5.4 billion of inflows since then. At the same time, debt inflows have also strengthened to USD 7.3 billion, supported by changes in government securities taxation and a more positive outlook for the currency.

With India's prospective inclusion in the Bloomberg index, passive debt inflows are likely to remain strong even in FY28, as per ICICI Bank. 'The biggest change in capital flows is on account of FCNR inflows which have increased to USD 52.3bn as of 13 August as against USD 36.7bn as of end July,' it stressed, adding 'overall BoP surplus for the year is estimated at around ~USD 55bn which is positive for INR in the medium-term

Overall, as per the lender, in the longer term, the rupee outlook will depend on Asian currencies and capital inflows. However, renewed pressure on Asian currencies could create a depreciation bias for the Indian currency. (ANI)