New Delhi [India], December 29 (ANI): India’s current account deficit (CAD) widened slightly to USD 11.2bn (1.2 per cent of GDP) in Q2 from USD 10.2bn (1.1 per cent of GDP) in the previous quarter, a report by ICICI Bank Global Markets anticipated.
However, there was a Balance of Payments (BoP) surplus of USD 23.8 billion was there in the first half (H1).
If a similar outflow happens in the second half (H2), it will result in a neutral BoP for the financial year (FY25), says a report by ICICI Bank Global Markets.
The report, however, added that the rising FPI outflows, which reached USD 10.6 billion in the third quarter (Q3), coupled with a widening trade deficit, have altered the trajectory and it could raise the risk of the BoP moving into negative territory for the year.
“As against a BoP surplus of USD 23.8bn in H1, we expected an outflow of similar amount in H2 thus leading to neutral BoP for the year. If FPI outflows are higher then BoP could be in negative for the year. This implies recent depreciation bias seen for INR should continue” said the report.
In the first half, the country recorded a BoP surplus driven by strong foreign portfolio investment (FPI) inflows, which helped offset the widening current account deficit (CAD).
However, the widening trade deficit, which was driven largely by a surge in gold imports, reached an all-time high of USD 37.8 billion in November, exacerbating the overall external sector imbalances.
While services exports and remittances have remained resilient, mitigating the impact on the current account deficit (CAD), the outlook for the BoP has deteriorated.
Merchandise exports, especially oil, have struggled, and FPI outflows are now a key risk.
Despite the buoyant performance of India’s services sector–especially in IT and business services–the recent surge in gold imports and subdued exports due to global economic conditions, including lower oil exports, have weighed heavily on the external sector.
The capital account, which had recorded inflows of USD 30.5 billion in Q2, saw FPI inflows drop significantly, while net FDI inflows remained muted.
The report added that given these challenges, India’s external sector outlook is now more uncertain, with FPI outflows, a stronger dollar, and a global rise in interest rates compounding the situation.
It further added that if the trend of higher FPI outflows continues, then the BoP will experience a significant reversal, leaving it at a neutral or even negative position by the end of FY25.
This has important implications for the Indian Rupee which is likely to continue its depreciation bias amidst global currency pressures.
With a weaker BoP and external headwinds, India’s current account deficit remains manageable for now, but the external sector’s vulnerability highlights the need for careful monitoring of capital flows and trade balances as the year progresses, the report added.(ANI)
