India’s Current Account Deficit (CAD) to Stay Manageable Despite Merchandise Trade Deficit: Crisil

India’s Current Account Deficit (CAD) is expected to stay within manageable limits during the financial year 2024-25, thanks to robust services exports and healthy remittances. According to a recent report by Crisil, CAD is forecasted to be around 1.0% of GDP, slightly higher than the 0.7% recorded last year. The report also emphasised that geopolitical risks will remain an important factor to monitor.

Stable Current Account Deficit in Q2 of FY 2024-25

India's current account deficit remained almost unchanged in the second quarter of FY 2024-25, standing at $11.2 billion (1.2% of GDP) compared to $11.3 billion (1.3% of GDP) in the same quarter of the previous year. However, there was a slight sequential increase from $10.2 billion (1.1% of GDP) in Q1 of FY 2024-25.

Financial Inflows Support India's External Payments Position

The Crisil report highlights that despite the widening merchandise trade deficit, financial inflows into India have increased, which has helped manage the CAD. Notable inflows include a surge in foreign portfolio investments, which totaled $19.9 billion, up from $4.9 billion in the same quarter last year. Equity inflows alone amounted to $10.7 billion, compared to $3.6 billion in Q2 of FY 2024.

Foreign Exchange Reserves Dip Amid RBI Interventions

India’s foreign exchange reserves saw a decline from $692.3 billion in Q2 to $644.4 billion by December 2024. This decrease is primarily attributed to the Reserve Bank of India’s (RBI) efforts to stabilise the rupee amidst increasing volatility. The rupee depreciated to 83.8/$ in Q2 of FY 2024-25, compared to 82.7/$ in the same period last year.

While India's current account deficit is under pressure due to the merchandise trade deficit, the increase in financial inflows, coupled with services exports and remittances, is expected to keep the CAD within manageable levels for FY 2024-25.