India’s Current Account Deficit Widens To Highest Since 2013

India’s current account deficit widened to the highest since 2013 at 2.8% of the GDP in the quarter ended June, led by a rise in merchandise trade deficit and net outgo of investment income payments.

India’s current account balance recorded a deficit of $23.9 billion (2.8% of GDP) in the first quarter of FY23, up from $13.4 billion (1.5% of GDP) in Q4 FY22 and a surplus of $6.6 billion (0.9% of GDP) in Q1 FY22, as per data released by the Reserve Bank of India on Thursday.

The underlying reason was the widening of the merchandise trade deficit to $68.6 billion from $54.5 billion in Q4 FY22, and an increase in net outgo of investment income payments.

Net services receipts increased, both sequentially and year-on-year, on the back of rising exports of computer and business services, the RBI said.

According to Aditi Nayar, chief economist at ICRA, while the current account deficit nearly doubled in Q1 FY23 relative to Q4 FY22, following the spike in commodity prices and sluggish exports, it came in significantly below its forecast of around $30 billion, with a positive surprise in the goods, services and secondary income balances.

The size of the current account deficit in Q1 FY23 was similar to the level recorded in Q3 FY22, Nayar said.

Based on the preliminary trends for July-August 2022 and expectations for September 2022, current account deficit is projected to widen to $35-40 billion in Q2 FY23 or around 4.2-4.8% of GDP, she said.

"However, we are cautiously hopeful that the size of the current account deficit will ease appreciably in H2 FY23, with seasonally stronger exports and softer commodity prices," Nayar said.

Nevertheless, the current account deficit is expected to exceed 3% of GDP in FY23, she said.

Key Highlights

• Private transfer receipts, mainly representing remittances by Indians employed overseas, amounted to $25.6 billion, an increase of 22.6% from their level a year ago.

• Net outgo on the income account, primarily reflecting payments of investment income, increased to $9.3 billion from $7.5 billion a year ago.

• 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 as against net inflows of $0.4 billion during Q1 FY22.

• Net external commercial borrowings to India recorded an outflow of $3.0 billion in Q1 FY23 as against an inflow of $0.2 billion a year ago.

• Non-resident deposits recorded net inflows of $0.3 billion as compared with $2.5 billion in Q1 FY22.

• Accretion of $4.6 billion to the foreign exchange reserves (on a balance of payments basis) in Q1 FY23 as compared with $31.9 billion in Q1 FY22.