CAD remains manageable, driven by strong service exports: RBI

The current account deficit (CAD) remains eminently manageable, driven by strong services exports and remittances, the Reserve Bank of India (RBI) said in its Financial Stability Report.  According to the central bank services exports and remittances are lending stability and sustainability.

“External sector resilience has been a key contributing factor in improving domestic macroeconomic stability. Despite overlapping global shocks, the trade deficit improved from $189.2 billion in April-November 2022 to $ 166.4 billion in April-November 2023,” RBI added.

As per the RBI report, the inclusion of the Indian government securities in the JP Morgan Global Bond Index - Emerging Markets from June 2024 could augur well for the outlook for capital flows to India. The report mentioned that external commercial borrowings (ECB) and non-resident deposits have also registered net inflows in 2023-24.

Foreign direct investment (FDI), however, remained subdued, reflecting the global retrenchment of these flows as well as an uptick in repatriations of FDI from India. “Overall, the increase in FPI, ECB, and non-resident deposit inflows is expected to offset the decline in FDI and support the financing of the CAD.” the RBI opines.

The RBI believes that the evolution of the trade balance would depend on the impact of the slowdown in global demand on merchandise exports; and the trajectory of imports, given strong domestic demand and volatile oil prices stemming from geopolitical conflicts.

The report also threw light on external vulnerability indicators and said, “ “External vulnerability indicators continue to show improvement: foreign exchange reserves of $616.0 billion as of December 15, 2023, are sufficient to cover about ten months of actual imports (on a BoP basis) for 2022-23.”

In addition, external debt moderated to 18.6 per cent of GDP in June 2023, and the share of short-term debt (with an original maturity of up to one year) in total external debt declined to 19.6 per cent in June 2023.