According to global brokerage firm UBS, the Indian economy is currently in a favorable position, with manageable macroeconomic risks. UBS predicts another year of robust growth for India, estimating a 7 percent growth rate in the fiscal year 2024-2025.
Traditionally, periods of high growth in India have been accompanied by an expansion of the current account deficit (CAD). However, in recent years, the CAD has remained within a sustainable range due to various factors such as a higher surplus in services trade and significant remittance inflows.
Despite these positive indicators, India remains susceptible to fluctuations in global oil prices, as it imports 87 percent of its oil demand. To sustain its growth trajectory, UBS recommends implementing measures aimed at boosting exports in both the services and manufacturing sectors.
India currently boasts the fourth-largest foreign exchange reserves globally, amounting to $617 billion as of mid-February 2024. UBS views this level of reserves as adequate, providing a cushion against external shocks.
While acknowledging that the high valuation of Indian equities may introduce some uncertainty regarding foreign institutional investor (FII) flows, UBS remains optimistic about India's growth prospects. Additionally, the anticipated inclusion of Indian bonds in global indices starting June 2024 could attract significant capital inflows, potentially offsetting any FII outflows.
However, UBS notes a slowdown in foreign direct investment (FDI) inflows to India, primarily attributed to repatriation of equity capital. This trend raises concerns about whether India is truly emerging as a prominent destination in the global supply chain shift away from China.
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