Why current account deficit moderated to 1.2% of GDP?

CAD softens: India's current account deficit (CAD) revealed a modest improvement, standing at $10.5 billion, or 1.2 per cent of GDP, the Reserve Bank of India said on Tuesday. This figure aligned closely with the forecasts of India Ratings and Research, indicating stability in the country's external economic dynamics. Looking ahead to the final quarter of the fiscal year, India Ratings and Research anticipates a positive trajectory for merchandise trade. Exports are projected to rise by 2 per cent year-on-year, hitting a seven-quarter peak of $117 billion. Simultaneously, imports are expected to climb by 8 per cent year-on-year, hitting a six-quarter high of $180 billion. These developments are poised to narrow the goods trade deficit to $64 billion.

“The current account deficit for 3QFY24 stood at USD10.5 billion which was 1.2 per cent of GDP. This was as per India Ratings expectations both in absolute (USD 10.7 billion) and relative terms (1.2 per cent of GDP),” Sunil Kumar Sinha (Senior Director & Principal Economist) & Paras Jasrai, Senior Analyst at India Ratings and Research said.

The goods trade deficit widened sequentially to $71.6 billion (7.9 per cent of GDP) from $64.5 billion (7.5 per cent of GDP) with a sequential gain in imports outdoing less robust exports. However, the uptick in goods trade deficit was largely offset by net invisibles and transfers. Non-software exports led the show with a massive 86 per cent sequential increase, driven by business and financial services, even as software services grew modestly. 

According to Emkay Global, the mild sequential moderation in the current account deficit (CAD) to $10.5 billion (1.2 per cent of GDP) in Q3FY24 reflected offsetting of higher trade deficit with better services exports and private transfers. 

Remittances

Remittances continued to surprise on the upside (70 per cent YoY), led by resilient growth in the US and GCC nations. Net investment income ($13.2 billion) continued to be a drag amid still-high global rates. FYTD24, CAD/GDP is tracking 1.2 per cent vs. 2.6 per cent a year ago, led by a lower goods deficit. 

FPI Flows

FPI flows boost Q3 capital account surplus; BoP surplus at $6 billion The boost in capital account surplus was led by massive net FPI flows ($12 billion vs. $4.9 billion in Q2) with debt flows nearly 3x of Q2, ahead of India's bond index inclusion. Net FDI flows rebounded to $4.2 billion in Q3 from net outflows of $0.6 billion in Q2; however, in FYTD24, net FDI flows have disappointed with a mere $8.5 billion on the downside.  Q3FY24 CAD/GDP improves to 1.2 per cent, despite a sequential increase in goods deficit Q3 CAD moderated sequentially to $10.5 billion (1.2 per cent of GDP), improving mildly from the upwardly revised Q2 deficit of 11.4 billion (1.3 per cent of GDP) and the year-ago deficit of $16.8 billion  (2 per cent of GDP). 

“Q3 CAD funding has been smooth with massive FPI flows and consistently improving banking capital. Despite slower FDI flows, the rise in capital account surplus ($17.4 billion) has meant net accretion of $6 billion. For FY24E, we maintain CAD/GDP at 0.8 per cent, led by incrementally improving goods trade deficit and solid services trade surplus,” the report by Emkay added further. 

Services Sector

Despite global headwinds, the services sector continues to demonstrate resilience. High-frequency indicators point towards sustained demand, with the global services PMI hitting a seven-month high of 52.4 in February 2024. This buoyancy is observed across both developed and emerging markets, setting the stage for a record-breaking services trade surplus of $47 billion in the upcoming quarter.

The agency expects the merchandise exports to increase to around $117 billion in 4QFY24, up 2 per cent yoy. This would be a seven-quarter high. Likewise, the merchandise imports are expected to touch a six-quarter high of around $180 billion in 4QFY24, up 8 per cent yoy. Overall, Ind-Ra expects the goods trade deficit to moderate to $64 billion in 4QFY24.