India's CAD declines sharply to 1% of GDP in Q2

India's current account deficit declined sharply to 1 per cent of the GDP or $8.3 billion in the second quarter of this financial year, mainly due to lower merchandise trade deficit and growth in services exports, according to a RBI data released on Tuesday.

The current account deficit (CAD), which represents the difference between the total amount of money sent abroad and money received from overseas across the economy, was 3.8 per cent of GDP or $30.9 billion in the July-September quarter in 2022-23.

CAD was $9.2 billion or 1.1 per cent of GDP in the first quarter (April-June) of the current financial year 2023-24.

"Underlying the lower current account deficit on a year-on-year (y-o-y) basis in Q2:2023-24 was the narrowing of merchandise trade deficit to $61.0 billion from $78.3 billion in Q2:2022-23," said the data on Developments in India's Balance of Payments during the second quarter (July-September) of 2023-24.

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 Reserve Bank said.

Net services receipts increased both sequentially and on a y-o-y basis, it added.

In the first half of the fiscal, CAD moderated to 1 per cent of GDP from 2.9 per cent of GDP in the year-ago period, on the back of a lower merchandise trade deficit.

During the July-September quarter (Q2), the RBI data showed that 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 the second quarter of 2022-23.

Further, foreign portfolio investment recorded net inflow of $4.9 billion in the second quarter of the current fiscal, lower than $6.5 billion during the year-ago three months period.

According to the RBI, external commercial borrowings to India recorded net outflow of $1.8 billion in July-September of 2023-24, as compared to net outflow of $0.5 billion in similar period of 2022-23.

Also, non-resident deposits recorded net inflow of $3.2 billion, as compared with net inflow of $2.5 billion in the second quarter of the last financial year.

RBI also said there was an accretion of foreign exchange reserves (on a BoP basis) to the tune of $2.5 billion in the quarter under review, as against a depletion of $30.4 billion in the corresponding period of the last fiscal.

According to Aditi Nayar, chief economist, head-research and outreach, ICRA Ltd following the expansion in the merchandise trade deficit in October 2023, "we expect the CAD for the ongoing quarter to widen appreciably, to around $18-20 billion.

"Nevertheless, we now foresee the FY2024 CAD in a range of 1.5-1.6 per cent of GDP, unless commodity prices chart a sharp rebound."