India’s current account deficit (CAD) narrowed to $9.2 billion (1.1 per cent of GDP) in Q1 (April-June) 2023-24, from $17.9 billion (2.1 per cent of GDP) in Q1 2022-23, according to RBI.

However, CAD in the reporting quarter was higher than the $1.3 billion (0.2 per cent of GDP) recorded in the preceding quarter.

CAD occurs when the value of imports of goods/ services/ investment incomes is greater than the value of exports. 

The widening of CAD on a quarter-on-quarter (QoQ) basis was due primarily to a higher trade deficit, coupled with a lower surplus in net services and decline in private transfer receipts, according to RBI’s statement on developments in India’s balance of payments (BoP) .

Net services receipts decreased sequentially (from $39.1 billion in Q4FY23 to $35.1 billion in Q1FY24), primarily due to a decline in export of computer, travel and business services, though it remained higher (vis-a-vis Q1FY23 level of $31.1 billion) on a year-on-year (y-o-y) basis, RBI said.

Private transfer receipts, mainly representing remittances by Indians employed overseas, moderated to $27.1 billion in Q1 2023-24, from $28.6 billion in Q4 2022-23, but increased (vis-a-vis $25.6 billion in Q1FY23) on a y-o-y basis.

Lower trade deficit

“The improvement in CAD was mainly due to a lower trade deficit of $56.6 billion, as against $63 billion last year. This improvement was mainly due to declining commodity prices globally, which continued in this financial year,” said Madan Sabnavis, Chief Economist, Bank of Baroda.

He expects this trend to change track given the recent increase in crude oil prices, which has been above $90/barrel in September and nearing $100 in the coming days

Sabnavis said going ahead, the factors that need to be watched include the trade deficit, which will be pressurised by higher oil prices; FPI inflows, which have been volatile and negative this month (their future course will drive the capital account); ECBs, which may be less attractive given the higher interest rates in the US; and FDI, which should pick up in the next three quarters as it has been a major support for the BOP.

“We expect CAD to be in the region of 1.5-1.8 per cent of GDP for the year, but will hinge a lot on the oil economics,” he said.

RBI said net outgo on the income account, primarily reflecting payments of investment income, declined to $10.6 billion in Q1 2023-24, from $12.6 billion in Q4 2022-23, though higher (vis-a-vis $9.3 billion in Q1FY23) than a year ago.

FDI slips to $5.1 billion

Net foreign direct investment decreased to $5.1 billion from $13.4 billion a year ago. The net foreign portfolio investment recorded inflows of $15.7 billion, as against net outflows of $14.6 billion in Q1 2022-23.

Net external commercial borrowings to India recorded inflows of $5.6 billion in Q1 2023-24, as against outflows of $2.9 billion a year ago.

Non-resident deposits recorded net inflows of $2.2 billion, as compared with $0.3 billion in Q1 2022-23.

Aditi Nayar, Chief Economist, Head - Research & Outreach, ICRA, said: “India’s current account deficit (CAD) has widened to $9.2 billion (-1.1% of GDP) in Q1 FY2024, from $1.3 billion in Q4 FY2023 (-0.2% of GDP), but trailed our forecast, led by a healthier-than-anticipated merchandise trade balance, even as the services trade surplus and balance of secondary income were smaller than anticipated.” 

With the average merchandise trade deficit trending higher in July-August 2023 relative to Q1 FY2024 levels, and the recent rise in crude oil prices, ICRA estimates CAD to widen sequentially to $19-21 billion (-2.3% of GDP) in Q2 FY2024.

Overall, ICRA projects CAD to widen to $73-75 billion (-2.1% of GDP) in FY2024, from $67 billion (-2.0% of GDP) in FY2023, building in an average crude oil price of $90/bbl in H2 FY2024.