India's current account deficit in July-Sept rises sharply to 4.4% of GDP

India’s current account deficit (CAD) shot up to an all-time high of $36.4 billion, about 4.4 per cent of the country’s gross domestic product (GDP), in the quarter ended September 2022 (Q2FY23), owing to a widening of the merchandise trade gap.

According to Bloomberg data, the previous highest CAD in absolute terms was $31.8 billion in the quarter ended December 2012 (Q3FY13).

The CAD was $18.2 billion (2.2 per cent of GDP) in the first quarter ended June 2022 (Q1FY23) and $9.7 billion (1.3 per cent of GDP) a year ago (Q2FY22), said the Reserve Bank of India (RBI) in a statement.

The high CAD in Q2FY23 was due to the widening of the merchandise trade deficit to $83.5 billion from $63 billion in Q1FY23 and an increase in the net outgo under investment income, the RBI added.

Aditi Nayar, chief economist, ICRA, said while it was expected that the CAD would widen to an all-time high in Q2FY23, the size exceeded even the upper end of “our forecast range of $31-34 billion”. Negative surprises in the merchandise trade deficit and primary income outweighed the higher than expected services surplus and secondary income flows.

The RBI’s Financial Stability Report (FSR), released on Thursday, said the rise in the CAD due to the huge trade deficit in Q2FY23 reflected the impact of slowing global demand for exports, even as growth in services exports and remittances remained robust.

The net outgo from the primary income account, mainly reflecting payments of investment income, increased to $12 billion from $9.8 billion a year ago. Private transfer receipts, mainly representing remittances by Indians working overseas, amounted to $27.4 billion, an increase of 29.7 per cent from their level a year ago.

As for the balance of payments (BoP) position in Q2FY23, there was depletion in reserves of $30.4 billion. This was in contrast to an accretion of $31.2 billion in Q2FY22, which included special drawing rights (SDRs) of $17.86 billion by the International Monetary Fund on August 23, 2021.

Of the decline in reserves by $75 billion in 2022-23 (end-September 2022), about 66 per cent can be attributed to valuation losses as the dollar strengthened and yields on treasuries and other sovereign bonds rose, the FSR said.

For April-September 2022 (H1FY23), the country’s current account deficit shot up to 3.3 per cent of GDP from 0.2 per cent in H1FY22 due to a sharp increase in the merchandise trade deficit.

Net invisible receipts were higher in H1FY23 on account of more net receipts of services and private transfers. As for the BoP position in H1FY23, there was a depletion of $25.8 billion, the RBI said.

The FSR pointed out India’s external sector was facing strong global headwinds from rising risks of global slowdown, still elevated commodity prices, and volatility in capital flows. While moderation in external demand pulled merchandise exports into contraction in October 2022, the terms of trade have kept imports rising.

Commenting on the outlook for deficit in Q3FY23, Nayar said there had been a fall in the average trade deficit in October-November 2022 relative to the previous three months. Also, the services trade balance was robust in October 2022.

“We are cautiously optimistic that the size of the CAD will recede appreciably to $25-28 billion in Q3FY23,” she added.

It remains uncertain whether the negative impact of weak global demand on exports will outweigh the softening of imports related to the correction in commodity prices.

“At present, we foresee a CAD of $25-30 billion in Q4 FY2023. The estimate for the CAD in FY23 is at an unpalatable $115 billion of GDP,” ICRA said.