Current account deficit narrows to 1% of GDP in Q2 on smaller merchandise trade deficit

Current account deficit is the difference between exports and imports of goods and services. It is a key indicator of the country’s external sector.

Underlying the lower CAD on a year-on-year (y-o-y) basis in Q2 FY24 was the narrowing of merchandise trade deficit to $61 billion from $78.3 billion in the same quarter of the previous fiscal, the Reserve Bank of India (RBI) said in a release.

“India’s current account deficit for Q2 FY24 printed at $8.3 billion, well below our expectation of around $13 billion, led primarily by a smaller-than-anticipated merchandise trade deficit,” said Aditi Nayar, Chief Economist, Head-Research and Outreach, ICRA.

Following the expansion in the merchandise trade deficit in October 2023, Nayar expects the CAD for the ongoing (October-December 2023) quarter to widen appreciably, to around $18-20 billion. “Nevertheless, we now foresee the FY24 CAD in a range of 1.5-1.6 per cent of GDP, unless commodity prices chart a sharp rebound,” she said.

In the first half (April-September) of FY24, CAD moderated to $17.5 billion, or 1 per cent of GDP, from $48.8 billion, or 2.9 per cent of GDP, in the year-ago period on the back of a lower merchandise trade deficit. In Q2 FY24, services exports grew by 4.2 per cent on a y-o-y basis on the back of rising exports of software, business and travel services, the RBI data showed.

Net outgo on the primary income account, primarily reflecting payments of investment income, increased to $12.2 billion from $11.8 billion a year ago. Private transfer receipts, mainly representing remittances by Indians employed overseas, amounted to $28.1 billion, an increase of 2.6 per cent from their level during the corresponding period a year ago.

In the financial account, net foreign direct investment witnessed an outflow of $0.3 billion as against an inflow of $6.2 billion in Q2 FY23.

Foreign portfolio investment (FPI) recorded net inflow of $4.9 billion, lower than $6.5 billion during Q2 FY23. External commercial borrowings to the country recorded net outflow of $1.8 billion in Q2 FY24 as compared with net outflow of $0.5 billion in the same period last year.

Non-resident deposits recorded net inflow of $3.2 billion as compared with net inflow of $2.5 billion in July-September quarter of FY23.
In the reporting quarter, there was an accretion of foreign exchange reserves (on a balance of payment (BoP) basis) to the tune of $2.5 billion as against a depletion of $ 30.4 billion in Q2 FY23. In April-September 2023, there was an accretion of $27 billion to the foreign exchange reserves, on a BoP basis.

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