The International Monetary Fund (IMF) has recommended India to reduce import restrictions, particularly on intermediate goods, and liberalise its foreign direct investment (FDI) regime to address imbalances in the external sector.
Despite recent steps towards opening up the economy, India’s trade and capital account regimes remain relatively restricted, continuing to weigh on both exports and imports, according to the IMF’s External Sector report. Further improvements in the business environment, including trade infrastructure development, are seen as essential for maintaining external balance.
The IMF has recommended easing import restrictions and liberalising FDI to strengthen India’s external sector.
For FY25, the sector shows moderate strength despite global demand weakness and commodity price volatility.
The current account deficit is expected to remain smaller than anticipated.
Net FDI inflows are expected to decrease.
Foreign exchange reserves increased to $665.4 billion.
India’s external sector position for fiscal 2025 (FY25) is assessed as moderately stronger than expected. Despite the positive outlook the report highlights vulnerabilities arising from weakening global demand, geoeconomic fragmentation, and potential volatility in commodity prices and global financial conditions.
The current account (CA) deficit is projected to remain smaller than anticipated, driven by buoyant services exports and declining oil prices, although it is expected to converge to its norm over the medium term.
On India’s foreign asset and liability position, the IMF projects modest improvement, with the Net International Investment Position (NIIP) improving from -10.5 per cent of GDP in 2023 to -9.6 per cent by the end of 2024. This reflects nominal GDP growth and valuation changes, partially offsetting the impact of the current account deficit. External debt liabilities remain relatively low compared to peers, which minimises short-term rollover risks.
In terms of the current account, the IMF expects the deficit to widen slightly to -0.8 per cent of GDP in FY25, from -0.7 per cent in FY24, driven by domestic demand for imports and strong services exports. While the deficit is expected to increase to -0.9 per cent of GDP in FY26, the IMF notes that the overall CA deficit is projected to return to its norm of around -2 per cent of GDP in the medium term.
India’s real exchange rate (REER) has shown appreciation in the first half of 2024, supported by portfolio investment inflows, but reversed in the latter half due to shifts in investor sentiment and global uncertainty. The IMF’s assessment suggests a moderate overvaluation of the rupee, with the REER gap projected at -7.9 per cent.
The report also points to a decrease in net foreign direct investment (FDI) inflows for FY25, with steady gross inflows offset by increased disinvestment. However, the inclusion of Indian bonds in global indices is expected to support net portfolio investment inflows, helping to finance the current account deficit.
Finally, India’s foreign exchange reserves increased to $665.4 billion by the end of FY25, sufficient for precautionary purposes. The Reserve Bank of India’s interventions aimed to stabilise the rupee and reduce excessive market volatility.
Fibre2Fashion News Desk (HU)