Strong FDI and portfolio inflows in the second quarter were very positive developments, Citi India's economists Samiran Chakraborty and Anurag Jha has said in a report.
They said that the developments in the capital account (Balance of Payments) numbers - the jump in net FDI inflows from $4 billion in Q1 to $17.2 billion in Q2 was spectacular, making it the best-ever quarter for FDI flows.
Capital account surplus reached $12.7 billion in Q2 ($19.8 billion for H1). Even portfolio inflows were strong at $6 billion in Q2, aiding the capital account, while banking capital and lack of external commercial borrowing continue to be significant drags, they said in their report.
For H2 FY17, Citi's economists expect a similar capital account surplus taking the overall FY17 surplus to $39 billion. However, the $10-billion portfolio outflows in Q3 pose a risk to this view, especially if in the near term global events become more destabilising.
They said that the Q2 BoP surplus at $8.5 billion ($15.5 billion for H1) prepares the economy appropriately to move closer to their FY17 forecast of $29 billion. The Basic Balance (CAD + FDI) has also improved substantially in Q2 (from $5.9 billion in Q1 to $13.7 billion in Q2), positioning India well to brace the uncertainties from Fed and US Presidential announcements, they said.
They noted that the favourable basic balance has helped India weather the shocks of $6-billion portfolio debt outflows (in less than a month) and FCNR (B) repayment of $25 billion without much impact on the rupee. If the adverse growth impact of the demonetisation exercise is transitory then they do not expect much equity outflow and the external sector is unlikely to become a flash point, they said.