With the first quarter of FY25 recording a current account deficit (CAD) of 1.1% as a percentage of GDP, economists say the full year’s print should be in the same vicinity. According to a median of 10 estimates, CAD for the full year FY25 is projected to be at 1% of GDP.
Most economists feel sustained low oil prices and pick up in services exports in the coming months will curb the widening of the CAD. “Given that the U-turn in the global interest rate cycle is leaning towards frontloaded interest rate cuts, services exports are likely to see a gradual pick-up from current levels,” said Radhika Piplani, chief economist, DAM Capital. “This is the key to keeping the CAD levels within manageable limits, despite the increased likelihood of a wider trade deficit gap,” she added.
Data from Petroleum Planning & Analysis Cell shows that so far in September, the price of India’s crude oil basket has averaged $73.69/bbl; and in the current fiscal, $81.95/bbl. The 1% CAD projection is based on the assumption that the oil basket’s price would average around $80/bbl in FY25.
Services trade surplus, meanwhile, in the current fiscal is projected to rise to $175 billion from $163 billion in FY24, according to ICICI Bank. Services exports have maintained a steady momentum rising to $14 billion per month (average run-rate) during April to Aug. “With a steady pick-up in net services exports and remittances, CAD is seen at $32 billion (0.8% of GDP),” said the bank.
To be sure, the merchandise trade deficit has risen in the first two months of Q2FY25 as against the previous quarter. In July-August, the monthly trade deficit averaged 25% higher than in Q1FY25.
A surge in gold imports pushed up the import bill, and widened the merchandise trade gap. In August, gold imports soared 221% on year to $10 billion, higher than $3.2 billion monthly average in April-July.
Analysts say this surge in imports was a one-off, spurred by a steep customs duty cut announced by the government during the Budget in July. However, the import demand of gold remains strong in the near term ahead of the festive season, said ICICI Securities Primary Dealership (I-SEC PD) in a report. I-SEC PD has projected the trade deficit to widen to $265 billion in FY25 from $242 billion the previous fiscal.
On the capital accounts front, economists expect FPI and FDI inflows to improve going forward. In Q1FY25, net FPI inflows moderated to $0.9 billion from $15.7 billion in Q1FY24; while net FDI inflows rose to $6.3 billion from $4.7 billion.
“Election related uncertainty, and expectation of a rate cut by major central banks weighed on FII inflows in the first quarter. However, equity inflows have improved since then,” said Sakshi Gupta, principal economist, HDFC Bank. Data sourced from NSDL showed that net FPI inflows stood at $15.92 billion in April-September FY25, lower than $20.45 billion in H1FY24.
For the full fiscal, economists have projected net FPI flows to rise to $30-40 billion (vs $44 billion in FY24), supported by higher debt flows on account of the inclusion in the JP Morgan bond index, IPO related flows, and inflows into Indian assets due to the global rate cut cycle. And net FDI flows is likely to increase to $20 billion from $10 billion (in FY24)
“Overall BoP is seen at $49 billion in FY25 (USD 64bn in FY24). These are positive developments for INR. Given RBI’s reserve build-up and focus on financial stability, INR is seen trading in the range of 83.50 to 84.50 in the near-term,” noted ICICI Bank