India is, after all, perhaps the only one among the usual suspects to survive without Fed/IMF support. Merrill estimates the FY09 current account deficit at a doable 2.2% of GDP. INR to consolidate around current levels. The INR should also benefit later in the year from stronger risk appetite. The upside, however, is likely bound by a growing policy preference for a weak INR to support exports; combat imported deflation; and recoup ~US$30bn sold in the Indian Equities.
Falling oil prices limit Current Account Deficit (CAD) – the FY09 CAD at a doable US$27.3bn (2.2% of GDP).
Capital account deficit: FDI funding FII outflows to slow. Expect the capital account to slip into deficit from 1HFY09’s US$19.8bn, led by FII outflows and limited ECB inflows. The bulk of this, in our view, is already in the INR. Expect 2HFY09 FDI to slow with private equity contracting on a worsening growth outlook.
A significant part of Short-term external debt has already been repaid. It is the balance ~US$25bn of corporate trade credit that remains a potential trouble spot to be monitored closely.