India’s current account deficit (CAD) widened marginally to $9.7 billion or 1.1% of the gross domestic product (GDP) in April-June this year (Q1FY25) from $8.9 billion (1%) in the year-ago period (Q1FY24), and a surplus of $4.6 billion (0.5%) in the previous quarter (Q4FY24), the Reserve Bank of India said on Monday.
The widening of CAD on a year-on-year basis was primarily due to a rise in merchandise trade deficit to $65.1 billion in Q1FY25 from $56.7 billion in the year-ago quarter.
Though the CAD of Q1FY15 and Q1FY24 are somewhat comparable, the capital account was relatively weaker in the first quarter of the current fiscal. As a result, after financing the CAD, the net accretion to the forex reserves on a balance of payment basis was just $5.2 billion in Q1 this fiscal, as compared to $24.4 billion in Q1 last fiscal. On a BoP basis, Q4FY24 saw net accretion of foreign exchange reserves of a robust $30.8 billion.
For the quarter ended on Monday (Q2FY25), however, the CAD may be wider at 1.5% of GDP or higher, given that trade deficit was relatively high in the period. In July-August period of the second quarter of the current fiscal, exports fell 5.7% on year, and in August, treade deficit reached a 10-month high of nearly $30 billion.
As per the latest RBI data, net services receipts increased on a y-o-y basis to $39.7 billion in Q1FY25 from $35.1 billion a year ago. Services exports have risen on a y-o-y basis across major categories such as computer services, business services, travel services and transportation services.
Private transfer receipts, mainly representing remittances by Indians employed overseas, increased to $29.5 billion in Q1FY25 from $27.1 billion in Q1FY24.
Net outgo on the primary income account, primarily reflecting payments of investment income, increased to $ 0.7 billion in Q1F25 from $10.2 billion in Q1FY24.
In the financial account, net foreign direct investment inflows increased to $6.3 billion in Q1F25 from $ 4.7 billion in the corresponding period of 2023-24. However, net inflows under foreign portfolio investment fell sharply to $0.9 billion from $15.7 billion in Q1FY24.
Net inflows under external commercial borrowings (ECBs) amounted to $1.8 billion in Q1F25, lower than $5.6 billion in the corresponding period a year ago. Non-resident deposits (NRI deposits) recorded net inflows of $ 4.0 billion, higher than $2.2 billion a year ago.
Up to September 27 in Q2FY25, FPIs’ net investments in equity and debt stood at $16.2 billion.
Analysts see CAD of over 1.1-1.5% in FY25, against 0.7% in FY24.
Aditi Nayar, Chief Economist & Head – Research and Outreach at ICRA wrote: “While the CAD expectedly widened in Q1FY25, it undershot our forecast primarily on account of secondary income. Looking ahead, the spike in gold imports in August 2024 following the custom’s duty reduction is likely to bloat this quarter’s current account deficit considerably to nearly 2% of GDP. With gold imports unlikely to sustain this surge in the coming months, we expect the monthly merchandise trade deficit figures to ease. We foresee India’s current account deficit to average 1.1-1.2% of GDP in FY25.”
Madan Sabnavis, chief economist at Bank of Baroda wrote: “The (Q1CAD) is fairly comfortable and we may expect the deficit to be around 1.5% for the year (FY25) based on these trends persisting for the full year.”