June quarter CAD narrows to 1.1%, widens sequentially on higher trade deficit

India's current account deficit narrowed to $9.2 billion or 1.1 per cent of GDP for the April-June period, the Reserve Bank said on Thursday.

The current account deficit (CAD), which represents the difference between the total amount of money sent abroad and money received from overseas across the economy, stood at $17.9 billion or 2.1 per cent of GDP in the year-ago period.

However, the crucial number, representing external sector strength, has widened considerably compared to the $1.3 billion or 0.2 per cent level in the preceding quarter, the RBI said. 

"The widening of CAD on a quarter-on-quarter basis was primarily on account of a higher trade deficit, coupled with a lower surplus in net services and decline in private transfer receipts," it added.

Net services receipts decreased sequentially, primarily due to a decline in exports of computer, travel and business services, though was higher on a year-on-year (y-o-y) basis, the central bank said.

Private transfer receipts, mainly representing remittances by Indians employed overseas, moderated to $27.1 billion in the quarter against $28.6 billion in the quarter-ago period but were higher on a year-on-year basis.

Net outgo on the income account, primarily reflecting payments of investment income, declined to $10.6 billion in the June quarter from $12.6 billion in the March quarter, but was higher than the year-ago period.

The net foreign direct investment decreased to $5.1 billion from $13.4 billion a year ago, but the net foreign portfolio investment recorded inflows of $15.7 billion against net outflows of $14.6 billion in the year-ago period.  The net external commercial borrowings to India recorded an inflow of $5.6 billion in the quarter compared to an outflow of $2.9 billion a year ago, the RBI said. 

Non-resident deposits recorded net inflows of $2.2 billion against $0.3 billion in the year-ago period, it added. There was an accretion of $24.4 billion to the forex reserves on a balance of payments basis in the quarter compared to $4.6 billion in Q1FY23, the central bank said. 

Reacting to the release of data, Aditi Nayar, chief economist at the domestic rating agency Icra, said that with the average merchandise trade deficit trending higher in July-August 2023 relative to Q1 FY24 levels and the recent rise in crude oil prices, the CAD is likely to widen sequentially to $19-21 billion or 2.3 per cent of GDP in Q2 FY24.

The CAD is likely to widen to $73-75 billion or 2.1 per cent of GDP in FY24 from $67 billion or 2.0 per cent of GDP in FY23, she added.