India’s overall forex reserves to shrink further this year

The countrys trade deficit could rise to as much as $300 billion in 2022-23 fiscal year, pushing the current account deficit to about $140 billion, or 3.9% of the GDP, the bank estimated in a research note.

“If the current account deficit indeed rises to $140 billion, the overall BOP (balance of payment) deficit could be as large as $80 billion for FY23, as we are forecasting a capital account surplus of about $60 billion,” said Kaushik Das, chief economist, India and South Asia, Deutsche Bank.

Accounting for a decline in reserves due to changes in valuation, the deficit in the current fiscal could be as large $100 billion-$105 billion, Das said.

Indias spot forex reserves fell to $561 billion by end-August from $607 in end-March, while net forwards outstanding likely declined to $17 billion from $66 billion, implying a drawdown of $49 billion, Das estimated.

The overall forex reserves, including spot rupee and forwards, stood at of $578 billion at the end of August and is likely to fall to below $550 by the end of this fiscal year, Das said.

He highlighted a speech by Reserve Bank of India Governor Shaktikanta Das earlier this week that said the central bank would aim to anchor expectations around the depreciating rupee and intervene to prevent an overshoot.

“With the RBIs proactive FX intervention expected to continue – to smoothen volatility and prevent excessive depreciation in rupee – FX reserves are likely to fall further from current levels,” Deutsche Bank said.