Godman Sachs Lift Nudging USD/INR Forecasts Upwards

Goldman Sachs note that “for INR, pressure from external balances may continue in the months ahead: our India economics team have revised their current account deficit forecasts wider to reflect the terms-of-trade shock from elevated commodity prices, downward growth revisions globally and rising U.S. recession risk. We are now expecting the current account deficit to widen to USD110bn (or 3.2% of GDP) in 2022 from USD34bn (or 1.1% of GDP) in 2021. In terms of flows, there has been USD28bn of equity outflows year-to-date, and our equity strategists remain market weight on Indian equities and, given our forecast of 185bps of RBI policy rate hikes in the pipeline and bond index inclusion unlikely this calendar year, we think fixed income flows will remain tepid. As a result, we expect net foreign portfolio investment outflows of USD15bn in 2022, and we adjust our capital account forecast to +USD45bn (primarily bolstered by FDI). Overall, we have lowered our BOP forecast to a USD65bn deficit in 2022 (from a BOP surplus of USD66bn in 2021 and USD100bn in 2020). Moreover, we expect the BOP to remain in deficit at around USD37bn in 2023. And, setting aside India’s external balances, our economists have noted a gradual deterioration in India’s external vulnerability indices, with FX reserves declining sharply (to USD590bn in June 2022 from USD640bn in 2021), lowering India’s import cover to 9-months from 11-months at the end of Dec-2021. Given the changes to our BOP forecast, we have revised our USD/INR forecasts to INR80, INR81 and INR81 over 3-month, 6-month and 12-month horizons from INR79, INR79 & INR78 respectively, with risks tilted towards even further weakness in the event of more acute USD strength.”