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India’s current account deficit at 15-quarter high in Q1

India’s current account deficit (CAD) came in at 2.8% of the gross domestic product (GDP) in Q1FY23, a 15-quarter high, driven by an elevated merchandise deficit, but it was still lower than feared by many, as foreign exchange inflows from services exports and private remittances remained stronger than estimates. Despite net portfolio outflows of a considerable $14.6 billion, the forex reserves saw a modest rise of about $4.6 billion in the quarter on a balance of payments (BoP) basis. This was because the capital account saw a good surplus of close to $28 billion helped by robust inflows as FDI, loans and banking capital.

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However, that doesn’t allay the worries on the BoP front much. Many analysts see the CAD having widened further in the September quarter – Icra, for instance, forecast the CAD to worsen to 4.2-4.8% of the GDP in Q2FY23.

While the merchandise trade deficit was $68.6 billion in Q1FY23, already an all-time high for any quarter, this deficit could be even higher in Q2 – record monthly deficit of $30 billion was reported in July before it eased a tad in August to $28 billion.

While imports continued to be strong in Q2FY23, exports remained subdued amid demand slowdown in recession-hit US and the EU markets.

Meanwhile, foreign portfolio investors, who turned net net buyers for the first time in July after nine months of net outflows, pumped in a net investment of about `5,000 crore in August. However, the inflows have slowed down in September.

India’s forex reserves declined stood at $545.7 billion as on September 16, a near two-year low, yet sufficient to cover nine months of imports.

Releasing the BoP data for the June quarter, the Reserve Bank of India (RBI) said on Thursday: “India’s current account balance recorded a deficit of $23.9 billion (2.8% of GDP) in Q1FY23, up from $13.4 billion (1.5% of GDP) in Q4FY22 and a surplus of $6.6 billion (0.9% of GDP) a year ago.”

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Much of the increase in trade deficit is caused by the rise in oil prices and jump in imports of critical raw materials such as coal. The worsening goods trade balance is attributable to geopolitical turmoil caused by the protracted Russia-Ukraine war.

The RBI said: “Underlying the CAD in Q1FY23 was the widening of the merchandise trade deficit … and an increase in net outgo of investment income payments.”

It added: “Net services receipts increased, both sequentially and on a year-on-year basis, on the back of rising exports of computer and business services. Services exports grew y-o-y by 35.4%, led by broad-based growth in computer, business, transportation, and travel services.”

Private transfer receipts – remittances by Indians employed overseas – amounted to $25.6 billion, an increase of 22.6% on year.

The central bank also noted that in the financial account, net foreign direct investment increased to $13.6 billion from $11.6 billion a year ago. Net foreign portfolio investment recorded outflows of $14.6 billion against net inflows of $0.4 billion during Q1 of 2021-22.

There was an accretion of $4.6 billion to the foreign exchange reserves on a BoP basis in Q1FY23 compared with $31.9 billion in Q1FY22 and depletion of $16 billion in Q4FY22.

The CAD had stood at 2.86% of GDP in Q2FY19. Aditi Nayar, chief economist at Icra, said, “Based on preliminary trends for July-August 2022, and our expectation for September, we project CAD to widen further to $35-40 billion in Q2FY23, or around 4.2-4.8% of GDP. However, we are cautiously hopeful that the size of the deficit will ease appreciably in H2FY23, with seasonally stronger exports and softer commodity prices. Nevertheless, we still expect the CAD to exceed 3% of GDP in FY2023.”

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