Cheers for reduced CAD print amid concerns of worsening in future

Even as India's current account deficit for Q2 has printed at $ 8.3 billion or one per cent of the GDP, it is now likely to go northwards only. Notably, CAD stood at $ 9.2 bn or 1.1 per cent of GDP, while the year-ago figure was at $ 30.9bn or 3.8 per cent of GDP. Of course, the figures shown by CAD have been influenced by a smaller-than-anticipated merchandise trade deficit and despite a higher trade deficit. There is no denying that the improvement on the net invisibles front acted as a cushion, particularly in the wake of an increase in the goods trade deficit to $ 61.0 bn or seven per cent. Following the expansion in the merchandise trade deficit in October, Icra expects the CAD for the ongoing quarter to widen appreciably to around $ 18-20 billion. The credit rating agency now foresees the current fiscal year’s CAD in the 1.5-1.6 per cent range of GDP. The only rider being that commodity prices chart a sharp rebound. However, the reversal of FPI and FDI flows led to a sharp fall in capital account surplus, with a small BoP surplus (USD2.5bn) for the quarter. For FY24, Emkay Global maintains CAD/GDP at 1.4 per cent, led by incrementally improving goods trade deficit in comparison to FY23 and solid services trade surplus.

Non-software exports also rebounded from the previous quarter’s one-year low, following an improvement in R&D and travel services exports. Net remittances rose nine per cent QoQ, while net investment income, $ 12.2 bn continued to be a drag amid higher global rates. Net ECBs turned negative for the first time since Q3FY23, due to higher rates abroad. Banking capital flows declined but stayed positive. Volatility in banking capital has persisted for over a year and the trend will likely stay patchy with global rate uncertainty set to continue. Overall, Q2 BoP stayed positive but fell to $ 2.5 bn from $ 24.4 bn in Q1, while the basic balance, or CAD+FDI, which reflect durable funding, stayed negative at -$ 8.6bn from –$ 4.1 bn. Q3 CAD/GDP is likely to worsen with a sequentially wider goods deficit led by high imports due to the ongoing festive season, no matter if services improves further.

The upside risks to experts’ forecast from higher crude oil prices have receded somewhat, as concerns over slowing global demand have kept Brent below $ 80/bl since November, despite the ongoing conflict in the Middle East. Additionally, solid services or non-software trade surplus will continue to partly offset the merchandise trade deficit. With the trade deficit narrowing and service surplus remaining steady, the current account deficit for the entire fiscal is expected to be around 1.5-2 per cent of GDP, says a study by Anand Rathi. While an expansion in services surplus has supported the current account, the expanded trade deficit in October, ‘23 and November ’23 accompanied by weak portfolio flows in the first half of Q3 will result in a higher deficit in the coming quarter.