India’s Current Account Deficit Widens To Record 4.4% Of GDP In Q2 FY23

India's current account deficit continued to widen in the July-September quarter amid a rising merchandise trade deficit.

The current account deficit increased to $36.4 billion, or 4.4% of the GDP, in Q2 FY23, up from $18.2 billion, or 2.2% of GDP, in Q1 FY23 and $9.7 billion, or 1.3% of the GDP a year earlier, according to data released by the Reserve Bank of India on Thursday.

The underlying reason was the widening of the merchandise trade deficit in Q2 FY23 to $83.5 billion from $63.0 billion in Q1 FY23 and an increase in net outgo under investment income.

"While it was expected that India's current account deficit would widen to an all-time high in Q2'23, the size of the deficit exceeded even the upper end of our forecast range of $31-34 billion," said Aditi Nayar, chief economist at ICRA. She explained that negative surprises in the merchandise trade deficit and primary income outweighed the higher-than-expected services surplus and secondary income flows.

With a fall in the average trade deficit in October-November 2022 relative to the previous three months and a robust services trade balance in October 2022, the size of the CAD will recede appreciably to around $25-28 billion in Q3 from the all-time high while remaining substantial, according to ICRA's estimates.

"We project the FY2023 CAD at an unpalatable $115 billion of GDP," Nayar said.

• Services exports reported a growth of 30.2% year over year on the basis of rising exports of software, business, and travel services. Net service receipts increased both sequentially and on a year-over-year basis.

• Net outgo from the primary income account, mainly reflecting payments of investment income, increased to $12.0 billion from $9.8 billion a year ago.

• Private transfer receipts, mainly representing remittances by Indians employed overseas, amounted to $27.4 billion, an increase of 29.7% from their level a year ago.

• In the financial account, net foreign direct investment decreased to $6.4 billion from $8.7 billion a year ago.

• Net foreign portfolio investment recorded inflows of $6.5 billion, up from $3.9 billion during Q2 last year.

• Net external commercial borrowings from India recorded an outflow of $0.4 billion in Q2 FY23 as compared to an inflow of $4.3 billion a year ago.

• Non-resident deposits recorded net inflows of $2.5 billion as against net outflows of $0.8 billion in Q2 FY22.

• There was a depletion of foreign exchange reserves (on a BoP basis) to the tune of $30.4 billion in Q2 FY23 as against an accretion of $31.2 billion in Q2 FY22.