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ICRA Research Report
India's current account deficit moderated to $18.2 billion (down 2.2% of gross domestic product) in Q3 FY23 from the revised $30.9 billion in Q2 FY2023 (down 3.7% of GDP). This sequential easing was led by a narrower merchandise trade deficit and higher services surplus. Moreover, the CAD printed well below our expectation ($22-25 billion) in Q3 FY23.
Encouragingly, India's net financial flows surged to a five-quarter high $30.2 billion in Q3 FY23 from the revised $1.4 billion in Q2 FY23, with a sharp uptick in other investment outweighing the decline in net foreign portfolio investment and foreign direct investment inflows in that quarter.
Overall, the uptick in financial flows in Q3 FY23 vis-a-vis Q2 FY23, coupled with the moderation in the CAD between these two quarters, led to an accretion of reserves amounting to $11.1 billion in Q3 FY23, in contrast to the sharp drawdown seen in Q2 FY23 ($30.4 billion).
With a decline in the average trade deficit in January-February 2023 relative to the previous three months and our projections for March 2023, we expect the size of the CAD to recede below ~$10 billion (sub-1.0% of GDP) in Q4 FY23, lower than the year-ago level (-$13.4 billion).
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