The current account deficit is likely to have declined further in the fourth quarter of 2022-23, said the finance ministry on Tuesday, adding that FY23 closed with stronger stability in India’s external sector. This was led by forex reserves reaching an import coverage of 9.7 months and the CAD narrowing to a manageable level, said the Monthly Economic Review of March 2023 by the finance ministry.

“Larger reserves and narrower CAD will further stabilise the rupee as well,” the ministry said, adding that going forward, India’s trade deficit may further fall as PLI schemes deepen their impact and reduce the country’s import dependence. It also expressed hope that India’s recent engagements with the UAE the UK, and Australia and the launch of a new Foreign Trade Policy will increase the global market share of the country’s exports.

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According to data released by the Reserve Bank of India, the current account deficit narrowed to 2.2% of the GDP in the third quarter of FY23 from 3.7% in the second quarter and 2.7% in the third quarter of FY22.

Continuing improvement in the trade account is likely to drive the further narrowing of CAD, the report said, adding that this is seen in the relative movements of exports and imports on the merchandise account. Merchandise exports in the fourth quarter of FY23 are lower than the previous year’s corresponding quarter.

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However, year on year, merchandise imports have contracted by 4.7% in the same quarter, thereby improving the merchandise trade account. Overall trade account has further improved as net services exports are estimated to increase by 19.4% in the last quarter of FY23.

“The weakening of global growth and trade is expected to both weaken and strengthen the stability of India’s external sector. On the one hand, it may lower India’s exports and widen the CAD. On the other hand, it may reduce the value of imports by easing commodity prices and narrowing the CAD,” it said, adding that till now, the net impact of the two opposing effects has been positive in narrowing the CAD, which has in turn strengthened the stability of India’s external sector.