India’s current account deficit (CAD) widened to $36.4 billion, an all-time-high level in absolute terms, in the September quarter owing mainly to a record deficit of $83.5 billion in goods trade and an increase in net outgo under investment income, according to data released by the Reserve Bank of India (RBI) on Thursday. The CAD in the quarter was a worrisome 4.4% of the GDP, up from (revised) 2.2% in the previous quarter and a benign 1.3% in the year-ago period.

A relatively small capital account surplus of $6.9 billion in Q2FY23 wasn’t sufficient to finance the CAD, resulting in a massive depletion – $30.4 billion – of the foreign exchange reserves on a balance of payments (BoP) basis, as against accretions of $4.6 billion in Q1FY23 and $31.2 billion in Q2FY22. 

Analysts expect the CAD in the current quarter and the next to be large too, but less than in Q2, in the $25-30 billion range. Even though exports shrank 16.7% in October, the first drop in 20 months, and shipments growth was flat in November too, the merchandise trade deficit in the current quarter will likely be lower than in the last quarter, thanks to slower growth in imports.

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Already, goods trade deficit dropped to $22.9 billion in November, lower than the October level of $26.9 billion.

Still, the CAD for the whole of FY23 is predicted to be in the 3-3.5% of GDP range. Chief economic adviser V Anantha Nageswaran has recently said the keenly watched deficit may be 3-3.2% in the current fiscal, even as he stressed the external sector is still strong. 

The CAD soared to as high as 4.8% of GDP in FY13 before easing to 1.7% when the taper tantrum occurred. The country saw the deficit at elevated levels of 2.3-4.8% between the global financial crisis (FY09) and FY13 but since then, it has been largely moderate.

India usually enjoys a robust capital account surplus which allows it to finance CAD without depletion of forex reserves. However, there are some worries on this front now, given the continued geopolitical uncertainties, and the impending recession in Europe. A high CAD is one of the  causes of the rupee to slide.

Net portfolio inflows so far in the current quarter have been close to $5 billion, while Q2 saw net inflows of $6.5 billion. There were outflows of $14.6 billion in Q1. 

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Overall capital account surplus was weak in Q2FY23, also because inflows as banking capital were negative and loan inflows were weak.

“Negative surprises in the merchandise trade deficit and primary income outweighed the higher than expected services surplus and secondary income flows,” wrote  Aditi Nayar, chief economist at Icra, commenting on Q2FY23 BoP data.

Merchandise trade deficit was $68.6 billion in Q1FY23, then an all-time high for any quarter.

The RBI said in a statement on BoP in Q2: “Services exports reported a growth of 30.2% on a year-on-year (y-o-y) basis on the back of rising exports of software, business and travel services. Net services receipts increased both sequentially and on a y-o-y basis.”

Net outgo from the primary income account, mainly reflecting payments of investment income, increased to $12 billion from $9.8 billion a year ago.

The central bank also noted that private transfer receipts (remittances) amounted to $27.4 billion in the quarter, an increase of 29.7% on year. As for the first half of the current financial year, CAD stood at 3.3% of the GDP, as compared to 0.2% in the corresponding period last year. In H1FY23, the reserves depleted by $25.8 billion.