Since India is a developing economy, the fiscal deficit will continue to weigh down the INR as the government borrows more to fuel the economy and for social programs. Government expenditures will continue to trump revenues as capital expenditures are expedited. Fiscal Deficit: The last time we saw a positive fiscal balance was in the mid-1970s and has been negative since. We are very positive about FII, FDI, and FPI inflow India will witness and the subsequent currency appreciation this will result in.
The inflow of foreign money equips RBI with the firepower to quell currency depreciation and strengthens the INR. Considering the ambiguity with China and low growth prospects in other economies, we expect this FPI/FII trend to continue. FIIs and FPIs, especially as the dollar stabilizes, have been showing an appetite for the Indian markets. FII, FDI, and FPI inflow: With the advent of PLI and Atmanirbhar initiatives, FDI inflows are expected to exceed $100 billion for the year. India’s debt to GDP will continue to balloon as it emphasizes CAPEX and growth, however, the economy will support this debt by keeping interest rates capped. In contrast, the US and the EU are expected to expand by 0.5% let alone report a contraction resulting in a recession. India is forecasted to grow at 7% which positions itself as the fastest-growing economy in the world, a higher growth rate supports a stronger currency. India has a debt-to-GDP ratio of nearly 84% which is in stark contrast to 128% of the US. Economic Strength: Compared to developed economies, India is well positioned in terms of its debt repayment and servicing capacity. This plunge in interest rate differential will appreciate the INR in the coming years. Contrary to this, in the current scenario, interest rates in India have peaked whereas terminal interest rates are expected to approach 5.25% in 2023. During the last 10-year interest rates in India have been higher by 430bps in India and subsequently, we have seen the INR depreciate. Interest rate differential: According to uncovered interest rate parity, the currency of the country with a higher interest rate tends to depreciate. However, today we are seeing the differential narrowing and even turning negative recently.
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