Top Stories
Top Stories

Back to black: India on course for 2015 milestone

Getty Images

Breaking clear of its fragile status, India's current account is poised to swing into surplus for the first time in a decade as the sharp decline in commodity prices drives a significant improvement in the country's terms of trade.

India will post a current account surplus of 0.3 percent of gross domestic product (GDP) in 2015, forecasts Morgan Stanley, following an estimated 1.6 percent deficit in 2014.

The bank cites the collapse in the price of oil – India's largest commodity import - and lower gold imports as the two main factors helping the current account balance.

"Oil imports reflect the largest saving in the overall current account balance," Morgan Stanley said. The price of crude oil – which accounted for 34.5 percent of total imports in 2014 –has declined by 59 percent in rupee terms since June 2014.

India had 'lost hope' but it's back: Wipro CEO

Gold imports are also set to fall as inflation expectations fall and real deposit rates remain decidedly positive, the bank said. The yellow metal accounted for 7.7 percent of imports last year.

Breaking the trend

Asia's third largest economy has consistently run a current account deficit since 2005, hitting a peak of 5 percent of GDP in 2012, fueled by rising commodity prices and deterioration in productivity among other factors.

The current account balance measures the flow of goods, services, and investments into and out of the country.

Read MoreHope is back in India: Wipro CEO

Morgan Stanley isn't alone in its prediction for the country to swing into a surplus. This week, Nomura released its current account expectations for the first quarter, forecasting a surplus of around 1.5 percent of GDP.

"Part of this swing is seasonal in nature. India's current account balance tends to improve in Q1 (Jan-Mar) owing to a narrower trade deficit (lower gold imports and higher merchandise exports) and a higher invisibles surplus (software exports mainly)," Nomura said.

Greater protection

India's twin deficits – current account and fiscal – made its asset markets vulnerable to a withdrawal of foreign capital during the Federal Reserve induced "taper tantrum" of May 2013, when investors aggressively reduced exposure to countries with shaky economic fundamentals.

"The substantial improvement in India's current account deficit bodes well from a macro stability point of view and comes at a time when the U.S. [Federal Reserve] is likely to embark on a hiking cycle," Morgan Stanley said.

"In this context, the improvement in the current account balance will protect India from external funding risks and give the RBI comfort in targeting real interest rates," it added.

Read MoreIndia: fairestemerging market of them all?

A current account surplus would provide a major boost to investor sentiment, said Vishnu Varathan, senior economist at Mizuho Bank.

"India would have leapfrogged many emerging market economies" in terms of strengthening its macroeconomic environment, Varathan said. Compared with its commodity-exporting emerging market peers, India is much better place, he said.

The only point of caution is the sustainability of a current account surplus amid an upswing in oil prices, Varathan said. "In addition, 18-24 months forward, we could see more capital goods being imported into India, if investment ramps up, and that could knock of some of the gains from oil."