ADVERTISEMENT

Current Account Deficit To Narrow, Say Economists

The peak discomfort could be behind us, say economists.

<div class="paragraphs"><p>Source: Reuters&nbsp;</p></div>
Source: Reuters 

After widening to record highs, India's current account deficit is likely to ease in the coming quarters.

India’s Q2 FY23 current account deficit widened to a 37-quarter high of 4.4% of GDP while the accompanying net balance of payments position slipped to a deficit of 3.7% of GDP, its weakest since the 2008 Global Financial Crisis, according to a research note by QuantEco Research.

While that appears ominous, the peak discomfort could be behind us, it said.

Moderation in commodity prices, traction in service exports, and signs of stability in foreign portfolio investment would render the current account gap tenable from a macro stability perspective, said economists at QuantEco Research, revising their forecast to 3.1% of the GDP ($106 billion) from 3.7% projected for FY23.

Merchandise Trade Deficit Easing 

Encouragingly, on an average, the merchandise trade deficit stood at $24.9 billion during October-November FY23, trending below the elevated levels seen during Q2 FY23 at $25.9 billion.

This augurs well for the current account deficit for the ongoing quarter, said a note by ICRA, which forecasts merchandise trade deficit to moderate to about $73-76 billion in Q3 FY23, 23% higher than the $59.7 billion recorded in Q3 FY22.

While India’s services exports have grown by a healthy 29% year-on-year in April-October FY23, the hiring by some IT services companies has slowed as they turned cautious regarding the impact of a recession in the U.S. and Europe, which may weigh on India’s software exports in remainder of FY23, ICRA cautioned.

Still, services trade balance is expected to increase to $132-134 billion in FY23 from $107.5 billion in FY22, on the back of robust services exports and a weaker INR.

ICRA projects the current account deficit to moderate to about $25-28 billion in Q3 FY23 from the record-high of $36.4 billion recorded in Q2 FY23. As a proportion of GDP, the CAD is expected to remain elevated at 3.2% in Q3 FY23, albeit lower than the 4.4% witnessed in Q2 FY23.

Lower Oil Prices; Resilient Services To Help Rein In CAD

"We expect the current account deficit to materially drop in the coming quarters, driven by falling prices for energy and other commodity imports, despite likely softer exports into 2023," said Rahul Bajoria, chief economist at Barclays.

On the other hand, services exports are likely to remain robust after registering record highs in the past two quarters, Bajoria said. Indeed, some retracement is already visible in monthly trade numbers; the trade deficit has averaged $25.7 billion over October-November, following September’s record deficit of close to $30 billion.

Barclays expect India’s current account to register a full year deficit of $105 billion or about 3.1% of GDP in FY23, smaller than its previous forecast of $115 billion. The H1 FY23 deficit stands at $54.5 billion, even with the highs in commodity prices.

With commodity prices receding, especially for oil, where India also gets Russian crude at discounted values, trade deficit is expected to improve incrementally through the remaining two quarters of the fiscal year. Additionally, as mentioned above, the services trade surplus continues to reach record highs, and while much lower than the trade deficit in absolute terms, the offset here is increasing.

For FY23-24, Barclays forecasts current account deficit at $95 billion or about 2.6% of GDP from $105 billion earlier.