“CAD to widen sequentially to ~$10-12 billion in Q1 FY2024; USD/INR pair to trade between 81.0-84.0/$ in Q2 FY2024“
In line with expectations, India’s current account deficit (CAD) eased to a seven-quarter low of $1.3 billion (-0.2% of GDP) in Q4 FY2023 from the revised $16.8 billion in Q3 FY2023 (-2.0% of GDP). The sequential correction was led by a sharp $18.8 billion decline in the merchandise trade deficit, even as invisible earnings eased slightly owing to a dip in remittances.
Net financial flows to India fell considerably to $6.5 billion in Q4 FY2023 from the revised $28.9 billion in Q3 FY2023, owing to net FPI, banking capital and trade credit outflows (as against inflows on these accounts in the previous quarter), even as net FDI inflows rose in that quarter.
Overall, the sharp decline in financial flows in Q4 FY2023 relative to Q3 FY2023 more-than-offset the moderation in the CAD between these two quarters. As a result, the accretion to forex reserves declined to $5.6 billion in Q4 FY2023 from $11.1 billion seen in the prior quarter (on a BoPbasis).
In FY2023, the CAD nearly doubled to $67.0 billion (-2.0% of GDP) from $38.7 billion (-1.2% of GDP) amid a $75.8 billion surge in the merchandise trade deficit, even as invisible earnings rose sharply, led by a healthy growth in service exports and remittances. This, coupled with a 31% decline in financial flows led to a reserve drawdown (of $9.1 billion) in FY2024, after a gap of three years.
With a rise in the monthly average merchandise trade deficit during Apr-May 2023 vis-à-vis Q4 FY2023, ICRA expects the CAD to widen sequentially to ~$10-12 billion in Q1 FY2024, while remaining manageable at ~1.2% of GDP.
ICRA projects the CAD to rise mildly to $71-73 billion in FY2024 from $67.0 billion in FY2023, albeit remain at 2.0% of GDP, amid an expected sharper contraction in merchandise exports vis-à-vis imports and a relatively subdued outlook for services exports. ICRA expects the USD/INR pair to trade between 81.0-84.0/$ in Q2 FY2024.
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