CAD to come in at 9-year high in first quarter of FY23: Ind-Ra

Merchandise exports likely to slow down and come in at $104.2 bn in second quarter of the year

The country’s current account deficit (CAD) may have widened to a nine-year or 36-quarter high of 3.4 per cent of the gross domestic product (GDP) in the first quarter of this fiscal year against a surplus of 0.9 per cent a year ago, India Ratings (Ind-Ra) said on Friday.

Early signs showed that the deficit may remain elevated in the second quarter, too, as  exports growth slowed, crude prices remained elevated and the rupee depreciated against the dollar.

Before April-June of 2022-23, CAD was higher at 4.7 per cent of GDP in the first quarter of 2013-14.

In terms of absolute amount, CAD at $28.4 billion may have touched the highest level in 38 quarters, the rating agency said. Before this, the deficit was wider at $31.8 billion in the third quarter of 1012-13.

CAD was at $13.4 billion or 1.5 per cent of GDP in the fourth quarter of 2021-22.

The crucial issue in the balance of payments is whether the country would be able to finance its CAD through capital inflows in that quarter. Ind-Ra did not comment on that.

However, if one looks at two main components of capital inflows — foreign portfolio investment (FPI) and foreign direct investment (FDI) — it looks difficult that the CAD would be financed through these inflows and there could be some drawdown from forex reserves.

FPIs net sold $14.28 billion in the first quarter of FY23 from Indian markets. However, FDI inflow was at $22.34 billion during this period, even though moderately down by 0.79 per cent over $22.52 billion a year ago.

This meant that there was a net inflow of $8.24 billion from these two accounts during the period. Still $20.16 billion are needed to finance CAD, which has to come from other sources, such as NRI deposits, otherwise there was withdrawal from forex reserves.

Merchandise exports touched a record high of $121.2 billion in Q1FY23. Ind-Ra said they are likely to slow down and come in at $104.2 billion in the second quarter of the year, growing by just 1.4 per cent year-on-year (YoY) due to global headwinds.

The International Monetary Fund, in its July update, trimmed its forecast for global GDP growth to 3.2 per cent from 3.6 per cent in April 2022. Also, GDP forecasts of some of India’s key exporting destinations such as the US, Europe, and China have been revised downwards. This may put India’s export targets of $750 billion (goods and services) for FY23 in jeopardy.

On the other hand, Ind-Ra expected merchandise imports to remain robust due to elevated global commodity prices (Brent crude averaged $100.7 a barrel in August) and a weak rupee. The agency expected the rupee to average 79.6 against the dollar in Q2 of this financial year.

Merchandise imports grew 40.5 per cent YoY in July-August 2022 to $128.2 billion and are expected to come in at $192.2 billion in Q2 of FY23, increasing by 30.3 per cent YoY.

Ind-Ra expected the merchandise trade deficit to come in at a fresh high of around $87 billion in Q2 of FY23.