Will CAD cross $115 bn of GDP by FY23 end?

India's current account deficit (CAD) rose to 4.4 per cent of GDP in Q2, reveals a recently released data by Reserve Bank of India. Buoyed by it, analysts have now projected the FY23 CAD at an unpalatable $115 billion of GDP.

Not to mention that it stood at from 2.2 per cent during the April-June period, which can be attributed to the higher trade gap.

Services exports reported a growth of 30.2 per cent on a year-on-year (y-o-y) basis on the back of rising exports of software, business and travel services. Net services receipts increased both sequentially and on a yearly basis. On the net outgo front from the primary income account, mainly reflecting payments of investment income, increased to $ 12.0 billion from $ 9.8 billion a year ago.

While it was expected that India's current account deficit would widen to an all-time high in Q2, the size of the deficit exceeded even the upper end of analysts' forecast range of $31-34 billion. Negative surprises in the merchandise trade deficit and primary income outweighed the higher than expected services surplus and secondary income flows.

With a fall in the average trade deficit in Oct-Nov relative to the previous three months, and a robust services trade balance in October, Icra is cautiously optimistic that the size of the CAD will recede appreciably to around $25-28 billion in Q3 from the all time high recorded in the previous quarter, while remaining substantial.

Going ahead, it remains uncertain whether the negative impact of weak global demand on exports will outweigh the softening of imports related to the correction in commodity prices. At present, analysts foresee a CAD of $25-30 billion in Q4.

Private transfer receipts, mainly representing remittances by Indians employed overseas, amounted to $27.4 billion, an increase of 29.7 per cent from their level a year ago. In the financial account, net foreign direct investment decreased to $6.4 billion from $8.7 billion a year ago. Net foreign portfolio investment recorded inflows of $6.5 billion, up from $3.9 billion during preceding quarter. Net external commercial borrowings to India recorded an outflow of $ 0.4 billion in Q2 for an inflow of $4.3 billion a year ago.

Meanwhile, the RBI's Financial Stability Report has said the steady net inflows of foreign direct investment and the resumption of portfolio flows since July indicate that the CAD will be comfortably financed.

At present, the credit rating agency foresees a CAD of $25-30 billion in Q4. The reading reflected wider trade deficit in Q2, but this will likely be the peak of CAD this fiscal year as commodity prices have eased. An observation by Emkay also asserts that net investment income will continue to be a larger drag on CAD ahead amid higher interest rates abroad. Analysts see current account deficit at 3.4 per cent of GDP for FY23 for the fiscal year ending March.