Chennai: India’s external position in FY25 is moderately stronger than the level implied by medium-term fundamentals. Buoyant services exports and declining oil prices will keep the current account deficit smaller than its estimated norm but it will move up over the medium term due to the country’s development needs, finds the IMF.“The external position during fiscal year 2024/25 is assessed to be moderately stronger than the level implied by medium-term fundamentals and desirable policies,” IMF said in its latest report. Despite the external vulnerabilities stemming from weakening demand, geoeconomic fragmentation, and potentially volatile global financial conditions and commodity prices, the Current Account deficit to remain smaller than its estimated norm due to buoyant services exports and declining oil prices. However, it may move up over the medium term given India’s development needs. In the near term, the expected strengthening of private consumption will contribute to decreasing the CA balance. To facilitate external rebalancing, priority should be given to further reducing import restrictions, especially on intermediate goods, while continuing to improve the business environment to boost private investment and liberalize the FDI regime. These efforts should be complemented by the development of trade infrastructure and expansion of trade networks. Industrial policies should be pursued cautiously, remain narrowly targeted to specific objectives where externalities or market failures prevent effective market solutions, and aim to minimize trade and investment distortions. The Net International Investment Position-to-GDP ratio is expected to decline modestly over the medium term. India’s external debt liabilities are relatively low compared with its peers, and short-term rollover risks are limited. The moderate level of foreign liabilities reflects India’s incremental approach to capital account liberalization. While the expected rebound in net FDI inflows is projected to cover more than half of the CA deficit over the medium term, the compression of net FDI inflows in FY25 warrants further structural reforms and improvement of the investment regime to promote FDI. The inclusion of India in international bond indices has significantly increased foreign participation in India’s bond market and supported net portfolio inflows that financed the CA deficit. Various criteria confirm that official forex reserves are adequate for precautionary purposes. In view of India’s moderately strong external position, generally deep and liquid FX markets, limited FX mismatches, well-anchored inflation expectations, and adequate reserves, FX interventions should be limited to periods marked by destabilizing risk premiums.
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