RBI Reports Narrowing of India's Q2 Current Account Deficit to 1.1%

The Reserve Bank of India (RBI) has reported a narrowing of India's current account deficit (CAD) to USD 9.2 billion, equivalent to 1.1 percent of the Gross Domestic Product (GDP), for the April-June quarter. This marks a substantial improvement compared to the year-ago period when the CAD stood at USD 17.9 billion, accounting for 2.1 percent of GDP.

However, it's worth noting that the CAD has widened significantly from the preceding quarter's level of USD 1.3 billion or 0.2 percent of GDP, according to the RBI. The expansion of the CAD on a quarter-on-quarter basis is primarily attributed to a higher trade deficit, a reduced surplus in net services, and a decline in private transfer receipts.

The RBI elaborated, stating, "The widening of CAD on a quarter-on-quarter basis was primarily on account of a higher trade deficit, coupled with a lower surplus in net services and decline in private transfer receipts."

The decrease in net services receipts was mainly due to reduced exports of computer, travel, and business services, although it remained higher on a year-on-year basis, the central bank noted. Private transfer receipts, primarily representing remittances from Indians employed overseas, moderated to USD 27.1 billion in the quarter, down from USD 28.6 billion in the previous quarter but still higher compared to the same period last year.

The net outflow on the income account, reflecting payments of investment income, decreased to USD 10.6 billion in the June quarter, down from USD 12.6 billion in the March quarter but higher than the year-ago period.

While the net foreign direct investment fell to USD 5.1 billion from USD 13.4 billion a year ago, there were net foreign portfolio investment inflows of USD 15.7 billion, contrasting with net outflows of USD 14.6 billion in the same period last year.

India recorded net external commercial borrowings of USD 5.6 billion during the quarter, a significant change from the USD 2.9 billion outflow observed a year ago, as per the RBI's report. Non-resident deposits also saw net inflows of USD 2.2 billion, up from USD 0.3 billion in the corresponding period last year.

On a balance of payments basis, there was an accretion of USD 24.4 billion to the forex reserves during the quarter, compared to USD 4.6 billion in Q1FY23, according to the central bank.

Aditi Nayar, Chief Economist at Icra, a domestic rating agency, commented that with the average merchandise trade deficit rising in July-August 2023 compared to Q1 FY24 levels and recent increases in crude oil prices, the CAD is expected to widen sequentially to USD 19-21 billion or 2.3 percent of GDP in Q2 FY24. She further projected that the CAD for FY24 could reach USD 73-75 billion or 2.1 percent of GDP, up from USD 67 billion or 2.0 percent of GDP in FY23.