External sector performance improves

Indian Economic Update

  • Balance of payments clocked a USD 14.0 billion surplus in Q1, in line with the print for Q4, as a sharply buoyant capital account offset a poor current account performance.
  • Current Account Deficit (CAD) at USD 14.3 billion (2.0% of Gross Domestic Product (GDP)), was lower than the USD 15.8 billion deficit seen in Q1 FY2019. The annual improvement came on the back of a higher invisibles surplus, even as merchandise trade deficit widened.
  • Exports moderated in Q1, as trade hostilities between the US and China, as well as subdued growth prospects kept demand for India’s exports muted. The import bill was higher on a sequential basis, as gold and oil imports spurted on a substantial base effect, offsetting tepidity in non-oil non-gold imports. As a result, the trade deficit ballooned by a considerable approximately USD 11 billion sequentially.
  • Overall capital account surplus (including errors and omission) rose to a multi-quarter high of USD 28.3 billion in Q1 FY2020 aided by robust performance of foreign investment and External Commercial Borrowings (ECB).
  • Sharp inflows manifested in June once the Election outcome ensured the policy continuity necessary for permanent investment ventures. Gross Foreign Direct Investment (FDI) inflows into India were also higher by 28% YoY in April-June 2019, accompanied by further measures by the Indian Government to encourage FDI.
  • The Government has announced its borrowing calendar for H2 FY2020, pegging gross borrowing unchanged at INR 2.68 trillion. This will be done through 17 weekly auctions with 15 auctions to the tune of INR 160 billion and 2 auctions of 140 billion each. The Government also mentioned its intention to stick to its fiscal glide path and target of 3.3% of GDP in FY2020.
  • The much awaited liquidity framework report was released by the Reserve Bank of India (RBI) which lays out the guiding principles for the operating framework for interbank liquidity management. The key takeaways were a) Liquidity and monetary policy stance not linked; b) Assessment of further bond purchases likely to be scaled down; c) Daily liquidity operations to move to variable rate with overnight maturity; d) Long term repo/reverse repo as alternatives to open market operations.
  • India 8 core infrastructure industries contracted by 0.5% YoY in August against a 2.7% YoY growth in July.
  • India April-August fiscal gap came in at INR 5.5 trillion versus INR 5.9 trillion a year ago.

Global Update

  • The U.S. administration announced new tariffs on European Union (EU) products starting Oct 18. President Mr Donald Trump got the go-ahead from the World Trade Organisation (WTO) on Wednesday to impose tariffs on USD 7.5 billion worth of European exports annually in retaliation for illegal Government aid to Airbus. The U.S. plans to impose a 10% tariff on large civil aircraft from France, Germany, Spain and the U.K. It will also slap 25% levies on a range of other items including Irish and Scotch whiskies; wine, olives and cheese; as well as certain pork products, butter and yogurt from various European nations, according to the U.S. Trade Representative’s Office.
  • Protests in Hong Kong intensified as China celebrated 70 years of Communist rule.
  • The UK PM has offered a new deal for the EU to consider with regards to ‘Brexit’.


Indian equities ended lower as concerns over trade war and health of the Indian banking industry weighed on investors sentiment. Also, investors avoided placing broad-based aggressive bets ahead of a likely meeting of the Union Cabinet.


During the week Sensex lost 2.96% to close at 37673.31 while Nifty declined 2.93% to close at 11174.75.


Indian bonds ended higher because market participants expected an interest rate cut by RBI on Friday. Sentiment in the bond market improved after the RBI, said the Government would sell a new 10-year paper on Friday.


The 10Y benchmark yield ended at 6.67% as compared to the previous week’s close of 6.74%.


Oil is trading weaker pressured by concerns about global economic growth, oil demand and signs of excess supply despite Organisation of Petroleum Exporting Countries (OPEC)-led cuts. Lending oil some support was hopes that the US and China might make progress in resolving their trade dispute. Meanwhile, Saudi Arabia has fully restored oil output after attacks on its oil facilities last month and its oil production capacity now stands at 11.3 million barrels per day (mbpd), its energy minister reported.


Gold is trading steady as investors awaited more data with which to gauge US economic health and that could influence further US Federal Reserve action on interest rates. The disappointing data readings weighing on that Dollar that is in turn lending support to the yellow metal.


The Indian Rupee ended weaker against the US Dollar, tracking offshore Chinese Yuan. Dollar buys by foreign banks, likely for Foreign Portfolio Investment (FPI) outflows from local equities weighed on the Rupee.
Dollar index remained steady as traders were awaiting the employment situation report for September from the U.S. Labour Department.
EUR/USD is being weighed lower by continued concerns about the US imposing tariffs on the Euro-zone after a World Trade Organisation (WTO) ruling.
GBP/USD is trading 0.5% higher. USD/JPY is trading marginally lower.

Source: ICICI Bank Research, Private Banking Investment Strategy Team, Bloomberg and CRISIL.