ET Graphics: BoP stability tested by outflows & Rupee fall

India’s external account is coming under pressure with both current and capital accounts facing stress. Current account deficit is expected to widen, while capital account may see high outflows. To add to the woes, the rupee has depreciated around 11% over the past year and nearly 5% since the US-Iran conflict began.

Anoushka Sawhney takes a look:

If additional pressure on Rupee emerges, the RBI could consider range of measures, including reopening a currency swap window for OMCs, offering incentives for FCNR(B) deposits and further liberalising capital inflows, said Rajani Sinha, Chief Economist, CareEdge Ratings.

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Policy action outside conventional rate hikes will be tapped to anchor the currency, including removal of withholding tax for foreign investors in sovereign bonds, foreign currency bond issuances by PSBs on hedged basis, and deposit scheme to draw in non-resident inflows, said Radhika Rao, ED, DBS BANK.

“More than the widening current account deficit, it’s the shrinking capital account surplus weighing on BoP. We expect policymakers to, among other measures, create conducive conditions for state-owned lenders to raise foreign currency bonds,” said Aastha Gudwani India, Chief Economist, Barclays.