India's current account deficit (CAD) narrowed sharply to 0.9 per cent of GDP in the July-September (Q2) of FY2019-20 from 2.9 per cent in the year ago period and 2 per cent in the preceding quarter. This contraction in CAD was primarily on account of lower trade deficit.

CAD occurs when the value of goods and services a country imports exceeds the value of exports. A large CAD can cause the domestic currency to depreciate.

In absolute terms, the CAD in the second quarter came down to $6.3 billion from $19 billion in the year ago quarter and $14.2 billion in the preceding (April-June 2019) quarter.

Trade deficit in the quarter was lower too at $38.1 billion as compared with $50 billion a year ago.

Net services receipts increased by 0.9 per cent on a year-on-year (yoy) basis, on the back of a rise in net earnings from computer, travel and financial services, the RBI said.

Private transfer receipts, mainly representing remittances by Indians employed overseas, rose to $21.9 billion, increasing by 5.2 per cent from their level a year ago.

In the financial account, net foreign direct investment was $7.4 billion, almost same level as in corresponding Q2 of 2018-19.

Foreign portfolio investment recorded net inflow of $2.5 billion – as against an outflow of $1.6 billion in Q2 of 2018-19 – on account of net purchases in the debt market.

Net inflow on account of external commercial borrowings to India was $3.2 billion as compared with $2 billion in Q2 of 2018-19.

There was an accretion of $5.1 billion to the foreign exchange reserves as against a depletion of $1.9 billion in Q2 of 2018-19.

H1 CAD narrows

The CAD narrowed to 1.5 per cent of GDP in the first half (April-September) of 2019-20 from 2.6 per cent in H1 of 2018-19 on the back of a reduction in the trade deficit which shrank to $84.3 billion in H1 of 2019-20 from $95.8 billion in the same period of 2018-19.