India’s current account deficit to widen to 5% in Q2, 3.5% in FY23: ICRA

India’s current account deficit (CAD) will widen to 5% of the Gross Domestic Product (GDP) in the September quarter due to higher merchandise trade deficit, domestic ratings agency ICRA said.

The trade deficit has doubled to $28.7 billion for August due to a 36.8% expansion in imports and a 1.2% decline in export earnings.

“The current account deficit (CAD) is projected to widen to an all-time high of $41-43 billion in Q2 FY23 from the $30 billion expected in Q1 FY23. It is expected to widen to 5% of GDP in Q2 FY23, the second highest level since Q3FY12,” it said in a note.

For the first two months of the quarter, the monthly average trade deficit has trended higher at $29.3 billion as against $23.5 billion in the June quarter, driven by strong domestic demand which led to a surge in the imports while exports remained subdued amid international slowdown fears, ICRA said.

CAD will moderate to 2.7% of GDP in the second half of the fiscal, benefitting from lower commodity prices and seasonally stronger exports, it said, adding that a potential recession in major economies may dampen growth in merchandise and services exports in H2 FY23 as well.

“Overall, the CAD is projected to widen to an all-time high of $120 billion (3.5% of GDP) in FY23 from $38.7 billion (1.2% of GDP) in FY22,” the agency said, adding that the gap will be lower than the 4.8% witnessed in FY13.

During the last episode of widening CAD, the domestic currency had come under intense pressure. The agency said with the re-emergence of foreign portfolio investors (FPIs) equity inflows, it expects the Rupee to trade between 78.5-81 against the U. S. dollar in the rest of calendar year 2022 amid the global headwinds.

“While forex reserves have seen a drawdown of $45.4 billion in FY23 so far (till August 26, 2022), they remain large and are likely to prevent a disorderly depreciation of the Indian rupee,” it added.