In this edition of This Week In Data, we discuss:
India’s current account deficit moderated in the December quarter
Balance of Payments surplus and rupee stability
Slowdown in the growth of non-resident remittances
Money market rates signaling a pause from the MPC next week
Interest rate cycle and Bank spreads
Negative corporate tax collections in February
India’s current account deficit (CAD) moderated to 1.2% of GDP during the December quarter (3QFY24) from 1.3% in the preceding quarter and 2% from a year ago. In absolute terms, the CAD moderated significantly from almost US$17bn during the 3QFY23 to US$10.5bn during 3QFY24. Almost this entire moderation was due to a higher services trade balance. The merchandise trade deficit was flat on a YoY basis. Remittances were also largely flat on a YoY basis.
Capital flows were higher than the CAD and thus for the fifth consecutive quarter, India had a surplus on the Balance of Payments – implying money that came into India through the capital account (FDI, Borrowings, Portfolio Flows etc.) was more than the money that went out of India due to the deficit on current account (trade, remittances, investment expense etc.). Consequently, there was an increase in the FX reserves, which have since continued to increase during the current quarter also implying that 4QFY24 is also likely to see a surplus on the balance of payments. This is in large part why the rupee has remained remarkably stable in recent months. When inflows are more than outflows, it is easier for the RBI to modulate the exchange rate than when the vice-versa happens (inflows are less than outflows).
One of the key advantages for India is the remittances received from non-resident Indians. In 3QFY24, these remittances reached a record high of US$30.6bn. While this is positive, the growth rate has dramatically slowed in the last few quarters. In FY23 remittances grew over 25% YoY, on top of a double-digit growth in FY22. In the current year though growth has moderated to low single digits.
The Monetary Policy Committee (MPC) will meet next week for a decision on interest rates. The consensus expectation is for there to be no change in the policy interest rate. And the movements in money market rates are broadly in sync with this.
Thus, over the past month, the yield on 3mth GSec has remained largely unchanged (increased marginally, if one were to nitpick). That said, the curve has flattened at the shorter end – at the 6-month and 1-yr tenure, yields have compressed by 10bps over the past month. Markets are thus starting to price in a rate cut in the next 1-2 quarters.
And with the interest rate trajectory now looking like it will start to turn down in FY25, banks would be one of the biggest beneficiaries of it. Since April 2022 when the MPC started hiking rates, it has increased the policy Repo rate by 250bps. As against this, the weighted average lending rate on fresh loans by Banks increased by 185bps while the weighted average term deposit rate on fresh term deposits has increased by 240bps. Banks have thus effectively seen their spreads compress. If the rate cycle decisively reverses in FY25, then this spread ought to start to expand.
Lastly, February was a weak month for tax collections. Overall Central government’s gross tax revenues declined modestly on a YoY basis. This was largely due to negative corporate tax collections (implying refunds were more than collections). This is highly unusual and possibly a reflection of the bunching up of tax refunds. This phenomenon normally happens in the first couple of months of the year. Excluding this though tax collections grew by 9% YoY, slightly slower than the low double-digit growth in the preceding 3 months.
However, this decline in February means that unless tax collections grow by double digits in March, they will miss the revised estimate as per the budget. The general expectation hitherto was that the revised estimate for tax collections was a bit of a lowball.
That’s it for this week. See you next week.