Current account deficit narrows to 1% of GDP in July-September

India’s current account deficit narrowed in the July-September quarter on improving trade deficit during the period, Reserve Bank of India (RBI) data showed.

Current account deficit declined to 1% of gross domestic product (GDP) at $8.3 billion in the September quarter, against a deficit of $9.2 billion in the April-June quarter. The current account deficit in the July-September quarter a year ago stood at a massive $30.9 billion.

The RBI attributed the decline in current account deficit to the narrowing of merchandise trade deficit.

“Underlying the lower current account deficit on a year-on-year basis was the narrowing of merchandise trade deficit to $61 billion from $78.3 billion in the year-ago quarter,” the RBI statement said.

Services exports grew by 4.2% in the September quarter on rising exports of software, business and travel services, while net services receipts increased both sequentially and on a year-on-year basis.

Based on preliminary trends for October-November and expectation for December, ratings firm ICRA said the merchandise trade deficit is projected to widen to $75-77 billion in the current October-December quarter, while also mildly exceeding the $71.3 billion level seen a year ago.

This higher merchandise trade deficit is expected to widen CAD to about $20 billion in the current quarter, with the current account deficit for the full fiscal expected to be 1.5% of GDP, ICRA said.

Financial inflows into India dipped sharply to $10 billion in the September quarter from $34.2 billion in the previous quarter, while exceeding the year-ago level of $1.4 billion, ICRA said.

Private transfer receipts, mainly representing remittances by Indians employed overseas, amounted to $28.1 billion, an increase of 2.6% from a year ago.

Net inflow of foreign portfolio investments (FPI) fell from $6.5 billion in the July-September period of last year to $4.9 billion.

Net foreign direct investment saw an outflow of $0.3 billion during the quarter against a net inflow of $6.2 billion a year ago.

Non-resident deposits widened, recording a net inflow of $3.2 billion during the quarter against a net inflow of $2.5 billion a year ago.

There was an accretion of foreign exchange reserves (on a balance of payments basis) to the tune of $2.5 billion during the period under consideration against a depletion of $30.4 billion in the year-ago period, the RBI statement said.

India’s foreign exchange reserves have risen by $29.1 billion in the October-December quarter (up to 15 December) as against the $9.3 billion increase that was seen in the first half of the fiscal, ICRA said, suggesting that financial flows are likely to have seen a significant increase during this period thereby offsetting the sharp increase in the merchandise trade deficit.

“Going ahead, factors such as geopolitical tensions, FPI flows, crude oil prices, and trends in the DXY (dollar index) are likely to guide the trajectory of INR (Indian rupee) in the near term,” ICRA said.

However, going ahead, the inclusion of Indian bonds in the JP Government Bond Index-Emerging Markets (GBI-EM) Global Index and expectations of a pivot to interest rate cuts by the US Federal Reserve are likely to strengthen the rupee in the next fiscal year, it added.