Current Account Deficit Eases in Q2, Likely to Double in Q3

India’s current account deficit (CAD) for Q2 FY2024-25 moderated to $11.2 billion (1.2% of GDP) from $11.3 billion (1.3% of GDP) a year ago, as per RBI’s balance of payments (BoP) data. The moderation, despite a higher merchandise trade deficit, was driven by robust growth in services exports and improved net services receipts. However, a record-high trade deficit in November is expected to bloat CAD in Q3 to 2.5-2.7% of GDP.

Merchandise Trade Deficit Rises

The merchandise trade deficit grew to $75.3 billion in Q2 FY2024-25, up from $64.5 billion in Q2 FY2023-24, reflecting increased import activity. Despite this, services exports recorded substantial growth across categories such as computer services, business services, travel, and transportation, with net services receipts rising to $44.5 billion from $39.9 billion a year ago.

Financial Account Trends

In the financial account, net foreign direct investment (FDI) recorded an outflow of $2.2 billion in Q2 compared to $0.8 billion last year. Meanwhile, foreign portfolio investment (FPI) saw significant net inflows of $19.9 billion, up from $4.9 billion on-year. External commercial borrowings (ECB) inflows amounted to $5 billion, reversing last year’s outflows of $1.9 billion. NRI deposits also doubled to $6.2 billion from $3.2 billion in the same period.

Outlook for Q3 and FY2024-25

Economists predict a sharp rise in CAD to 2.5-2.7% of GDP in Q3 due to the record-high trade deficit in November. For the full fiscal year, CAD is expected to stabilize at 1.1-1.2% of GDP. Aditi Nayar, Chief Economist at ICRA Ratings, noted that the positive Q2 reading offers some comfort amidst the rupee’s weakening trend.

Summary of the news