CAD narrows to 1% in Q2, seen to widen in current quarter

CAD narrows to 1% in Q2, seen to widen in current quarter

India’s current account deficit (CAD) narrowed to 1% of the gross domestic product (GDP) in Q2FY24 from 3.8% in the corresponding period of FY23, helped by a moderation of merchandise trade deficit, stronger inflows from services trade and higher remittances. At 1.1%, the CAD was modest in Q1FY24 too.

In absolute terms, the CAD came in at $8.3 trillion in Q2 FY24, lower than $30.9 billion in Q2FY23, and $9.2 billion in Q1FY24. However, the quarter ended September 2023 saw only a modest accretion of $2.5 billion to the forex reserves on a balance of payment basis, compared with a seven-quarter high of $24.4 trillion in Q1FY24. In Q2FY23, there was a reduction of $30.4 billion in the reserves, as the capital account was insufficient to finance the bloated CAD.

The latest quarter under review saw the rare incidence of net FDI outflows ($0.3 billion) against inflows of $5 billion in Q1FY24 and $6.2 billion in Q2FY23. Net FPI inflows in Q2FY24 at $4.95 billion too was much lower than $15.73 billion in Q1FY24 and $6.5 billion in Q2FY23.

The sub account of “banking capital” also saw a big dip in Q2FY24 compared to the previous quarter – on net basis, the inflows on this account stood at just $4.3 billion in Q2 of this fiscal versus $12.9 billion in Q1. “Banking capital” in the balance of payment parlance refers to changes attributable to transactions among domestic and foreign banks.

External commercial borrowings recorded net outflow of $1.8 billion in Q2FY24 as compared with net outflow of $0.5 billion in Q2FY23.

Merchandise trade deficit in the second quarter of the current fiscal reduced to $61 billion from $78.3 billion in Q2 FY23, but it was still higher than $56.6 billion in Q1FY24.

Net outgo on the primary income account, which primarily reflects payments of investment income, increased to $12.2 billion in Q2 FY24 from $11.8 billion a year ago, the RBI said.

Cumulatively, in H1 of FY24, the CAD moderated to 1% of GDP from 2.9% in H1 FY23.

However, with the merchandise trade deficit rising sharply in the first two months of Q3FY24 and given threat of rise in oil prices looming, experts see a moderate rise in CAD in the second half, but the deficit would still be in relatively benign territory.

“Following the expansion in the merchandise trade deficit in October, 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% of GDP, unless commodity prices chart a sharp rebound,” said Aditi Nayar, chief economist, Icra.

The second half of FY24 is expected to see stronger FPI inflows with India’s inclusion in the JP Morgan bond index, which would make financing of the CAD comfortable. During Octover-December 2023, FPI net investments in equity and debt surged 96% to $9.9 billion as against $5 billion recorded in same period last year.

In October-November, the merchandise trade deficit had risen to 4.4% year-on-year to $50.5 billion. To average 1.5-1.6% in FY24, CAD should be in the range of 2.0-2.2% in H2.

In the first half, India recorded a net foreign direct investment (FDI) of $4.8 billion, which is lower than $19.6 billion in H1 FY23. Foreign portfolio investment recorded a net inflow of $20.7 billion as against an outflow of $8.1 billion last year, said the RBI.

In H1 this fiscal, there was accretion of $27.0 billion to the foreign exchange reserves on a BoP basis.