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India’s current account deficit (CAD) doubled sequentially to an all-time high of $36.4 billion in Q2 FY23 from $18.2 billion in the previous quarter, and was nearly four times higher than the $9.7 billion posted a year ago. CAD for FY22 was at $38.77 billion.
The Q2 CAD was equivalent to 4.4 per cent of the country’s GDP as against 2.2 per cent in the previous quarter and 1.3 per cent in the year-ago period, data released by RBI showed.
Trade deficit
Underlying the CAD in Q2 was the widening of the merchandise trade deficit to $83.5 billion from $63.0 billion in Q1 and an increase in net outgo under investment income, the central bank said in a note.
“While it was expected that the CAD would widen to an all-time high in Q2, the size of the deficit exceeded even the upper end of our forecast range of $31-34 billion,” said Aditi Nayar, Chief Economist, ICRA, adding that negative surprises in the merchandise trade deficit and primary income outweighed the higher-than-expected services surplus and secondary income flows.
For H1 FY23, the CAD was at $54.5 billion, 17 times more than the $3.1 billion reported in the previous year. It was equivalent to 3.3 per cent of the GDP, significantly higher than 0.2 per cent in H1 FY22.
Services exports
On the other hand, services exports reported a growth of 30.2 per cent year-on-year on the back of rising exports of software, business and travel services. Net services receipts increased both sequentially and annually to $34.4 billion in Q2, RBI said.
Private transfer receipts, mainly representing remittances by Indians employed overseas, also increased 29.7 per cent from a year ago to $27.4 billion in Q2. The quarter also saw net FPI inflows of $6.5 billion, up from $3.9 billion a year ago and NRI deposits inflows of $2.5 billion as against net outflows of $0.8 billion in the previous year. This was in line with the central bank relaxing norms for foreign investment in debt, external commercial borrowing and NRI deposits, in July, to arrest the slide of the rupee and shore up foreign reserves.
However, net external commercial borrowings recorded an outflow of $0.4 billion as against inflows of $4.3 billion a year ago, whereas net FDI decreased to $6.4 billion from $8.7 billion a year ago.
What to expect?
“With a fall in the average trade deficit in Oct-Nov 2022 relative to the previous three months, and a robust services trade balance in October 2022, we are cautiously optimistic that the size of the CAD will recede appreciably to around $25-28 billion in Q3, while remaining substantial,” Nayar said.
Given the uncertainty around the negative impact of weak global demand on exports versus the softening of commodity price-linked imports, CAD is seen at $25-30 billion in Q4 and at $115 billion for FY23, she added.
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