Q4 current account deficit narrows to $1.3 billion as trade gap shrinks

India’s current account deficit (CAD) narrowed to $1.3 billion (0.2% of GDP) in the fourth quarter of fiscal 2022-23, from $16.8 billion (2%of GDP) in the preceding three-month period, and $13.4 billion (1.6% of GDP) a year earlier, data released by the Reserve Bank of India (RBI) on Tuesday show.

“The sequential decline in CAD… was mainly on account of a moderation in the trade deficit to $52.6 billion in Q4:2022-23 from $71.3 billion in Q3:2022-23, coupled with robust services exports,” the RBI said.

Net services receipts increased, both sequentially and on a year-on-year (YoY) basis, on the back of a rise in net earnings from computer services. Private transfer receipts, mainly representing remittances by Indians employed overseas, rose 20.8% YoY to $28.6 billion.

Net outgo on the primary income account, largely reflecting net income payments on foreign investment, increased by $12.6 billion YoY, while showing a marginal sequential decline. the central bank said.

In the financial account, net foreign direct investment (FDI) at $6.4 billion was higher than $2 billion in Q3, although lower than a year earlier ($13.8 billion).

Net foreign portfolio investment (FPI) recorded an outflow of $1.7 billion – driven by the equity segment, as compared with an outflow of $15.2 billion during the year-earlier period, the RBI said.

Net external commercial borrowings (ECBs) recorded an inflow of $1.7 billion, as against an outflow of $2.5 billion during Q3 and an inflow of $3.3 billion in Q4 FY22. There was an accretion to the foreign exchange reserves (on a BoP basis) of $5.6 billion, as against a depletion of $16 billion in the year-earlier period, the central bank said.

For the full fiscal year, the current account deficit widened to $67 billion (2% of GDP), from a deficit of $38.7 billion (1.2% of GDP) in FY22, as the trade deficit ballooned to $265.3 billion, from $189.5 billion in the previous fiscal.

Net invisible receipts were higher in FY23 due to increase in net exports of services and net private transfer receipts, even though net income outgo was higher than a year earlier, the RBI noted.

Net FDI inflows at $28 billion were, however, lower than $38.6 billion in FY22. and net FPI recorded an outflow of $5.2 billion in FY23, compared with an outflow of $16.8 billion a year earlier, as per the RBI data

Net ECBs recorded an outflow of $4.1 billion in FY23 as against an inflow of $7.4 billion in FY22. In 2022-23, there was a depletion of $9.1 billion of the foreign exchange reserves (on a BoP basis).

“We expect a year-on-year improvement in the CAD in FY23-24,” said Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics at Barclays. “The current account deficit [of Q4] printed a tad higher than expected (our expectation was for a small surplus) due to a slightly higher goods deficit, a lower-than-expected services trade surplus and secondary income,” he added.

“Current account dynamics are expected to improve on average in the current year. We forecast the current account deficit to print lower in FY23-24: both export and import values are expected to soften owing to weak external demand and lower international commodity prices – leading to a narrower goods trade deficit compared to the previous fiscal year,” he added.

“We think a larger boost to the current account balance will come from a robust services trade surplus. We thus expect the current account deficit to print around $40 billion (1.1% of GDP) in FY23-24, and increase only modestly to 1.2% of GDP in FY24-25,” Mr. Bajoria further said.

“Current account deficit is expected to rise on-quarter in Q1 FY24 as merchandise trade deficit has widened again and the services trade surplus has moderated a tad,” said Dharmakirti Joshi, Chief Economist, CRISIL Ltd.