SBI CEA: For every rupee depreciation, software exports up by $250 mn

For example, in Q1, India’s CAD was expected to breach $30 billion/3.8 per cent of gross domestic product (GDP), but the actual numbers came in at 2.8 per cent of GDP.
Representative image
Representative image

CHENNAI: India’s software export revenue and remittances act as a strong counter cyclical buffer against increase in current account deficit (CAD) due to hike in global oil prices and rupee depreciation, said the State Bank of India’s (SBI) Chief Economic Adviser.

In a research report Dr Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI, said for every rupee depreciation, software exports increase by $250 million.

Ghosh said contrary to the expectations, the Q1FY23 Balance of Payments (BOP) numbers have shown that a strong counter-cyclical buffer in the form of service exports and remittances.

For example, in Q1, India’s CAD was expected to breach $30 billion/3.8 per cent of gross domestic product (GDP), but the actual numbers came in at 2.8 per cent of GDP.

The positive surprise was because of strong remittances and software exports, the CAD got a lift of 60 basis points, Ghosh said.

“We expect that if such trends of strong remittances and software exports have continued (RBI data suggests software exports in Q2 was strong) in Q2, and India’s CAD comes in below the threshold level o f 3.5 per cent of GDP in Q2, the CAD for FY23 could still be closer to 3 per cent benchmark and not in excess of 3.5 per cent of GDP,” he added.

Also, forex reserves could jump by another $5 billion as swap transactions reverse and thus having a positive impact on rupee as is being currently witnessed, he noted. To understand the factors that are impacting India’s CAD, Ghosh worked on the structural vector auto-regressions (SVAR) model.

With oil forming 30 per cent of India’s import bill, it has a major impact on macro-economic variables. An increase in oil import price impacts directly the trade deficit and consequently CAD gets widened.

That apart, it also results in inflation.

According to Ghosh, the SVAR model introduces a counter cyclical response to increased oil prices in the form of software service exports that is impacted positively because of a rupee depreciation.

“Although, remittances are positively impacted, we have not conside red them in our SVAR model because of data volatility.”

The results of the SVAR model clearly gives an idea of the negative impact of oil price shock on CAD, inflation and growth in one direction and the positive impact of software exports on CAD as a result of rupee depreciation.

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