Cushion Effect. CAD dips to 1.2% of GDP in Q3 as services exports rise

India’s current account deficit (CAD) narrowed in the third quarter (Q3FY24) with a rise in services exports and secondary income offsetting the marginally higher merchandise trade gap.

CAD narrowed to $10.5 billion (1.2 per cent of GDP) in Q3 (October-December) FY24, lower than $11.4 billion (1.3 per cent of GDP) in the preceding quarter. It narrowed appreciably vis-a-vis $16.8 billion (2 per cent of GDP) in the year ago quarter.

Merchandise trade

The merchandise trade deficit in Q3, at $71.6 billion, was up a tad than $71.3 billion a year ago.

A 16 per cent year-on-year (yoy) increase in net services receipts to $45 billion ($38,7 billion a year ago) helped cushion the current account deficit.

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Net outgo on the primary income account, primarily reflecting payments of investment income, increased to $13.2 billion from $12.7 billion a year ago, per the RBI’s statement on ‘Developments in India’s Balance of Payments’.

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Private transfer receipts, mainly representing remittances by Indians employed overseas, amounted to $31.4 billion, an increase of 2.1 per cent over the level in the corresponding previous period.

Foreign portfolio investments, foreign direct investmentsand non-resident deposits remained robust in the reporting quarter.

FPI inflows up

FPI recorded a net inflow of $12 billion in Q3, higher than $4.6 billion a year ago. Net FDI flows jumped to $4.2 billion ($2 billion). Non-resident deposits in Q3 rose to  $3.9 billion from $2.6 billion a year ago.

External commercial borrowings to India recorded a net outflow of $2.6 billion as compared with a net outflow of $2.5 billion a year ago.

Also read: Financial conditions may be less supportive of growth in fiscal 2025: Crisil

“The current account deficit narrowed in Q3 despite a wider merchandise trade deficit, cushioned by a record high services trade surplus and secondary income. Positive FDI and FPI flows kept the BoP (Balance of Payments) in surplus. We expect current account financing needs to remain manageable this fiscal year and the next,” said Rahul Bajoria, Head of EM Asia (ex-China) Economics Research, Barclays Investment Bank.

In a report, UBS Securities India said that based on its analysis, the threshold CAD level for India is 2.2-2.5 per cent of GDP in a steady state, assuming real GDP growth of 6-7 per cent, with inflation averaging 4-5 per cent and the cost of external liabilities at 2-3 per cent, keeping the threshold level of net external liabilities steady.

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