Indian economy continues to show resilience to external risks: UBS

The Indian economy has been in a sweet spot lately, with manageable macro risks, global brokerage, UBS said.

“We forecast another year of strong growth for India, at 7 per cent in FY25,” it said.

Historically, periods of high growth in India have been associated with widening current account deficit (CAD).

In recent years, CAD has not breached this sustainable range due to additional buffers created in the form of a higher services trade surplus and buoyant remittance flow.

India remains vulnerable to high global oil prices (importing 87 per cent of its oil demand).

Measures to boost services and manufacturing exports are necessary to support India’s higher potential GDP growth, UBS said.

India holds the fourth largest FX reserves in the world ($617 billion, as of mid-February 2024), which seems comfortable as a reserve adequacy metric, UBS said.

“While expensive Indian equity market valuation could create FII flow uncertainty, we believe India’s growth resilience, along with the forthcoming bond index inclusion (scheduled as of June 2024 onward and could lead to $30 billion of flow/60 per cent of the FY25 current account balance), will keep capital account in a surplus,” UBS added.

However, FDI inflows to India have slowed significantly versus the recent peak (largely due to equity capital repatriation), raising concerns if the country is really gaining prominence in the China+1 supply chain shift, it added.

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