India's current account slips into deficit, at 1.2% in FY22 on wider trade gap

Wider trade deficit driven by higher imports of goods led to India's current account slipping into deficit, at 1.2 per cent of GDP for FY22 against a surplus of 0.9 per cent of GDP in FY21.

In absolute terms, the deficit for FY22 came at $38.7 billion as against a surplus of $24 billion in the year-ago period, data released by the RBI showed.

Current account balances are generally taken as a key representative of a country's external strength, and a widening in the past had led to rupee depreciation and also actions by rating agencies on the sovereign rating.

For the January-March 2022 quarter, the CAD narrowed on a sequential basis to $13.4 billion or 1.5 per cent of GDP, as against $22.2 billion or 2.6 per cent of GDP in December 2021 quarter.

In FY22, the trade deficit widened to $189.5 billion, up from $102.2 billion a year ago, which resulted in a slippage on the number which is considered as a key representation of a country's external strength, the RBI said.

The Balance of Payments data suggested that goods imports stood at $618.6 billion in FY22 as against $398.5 billion in the year-ago period, leading to the widening of the trade deficit.

There has been a huge increase in commodity prices, especially crude oil on which India is dependent on imports. With the post-pandemic recovery leading to normalisation of economic activities, the demand for imports also rose.

The RBI said an increase in services exports and transfer receipts led to an increase in the net invisible receipts in FY22. The net benefit under the software services head alone stood at $109 billion.

Net foreign direct investment (FDI) inflows at $38.6 billion in FY22 were lower than $44 billion in FY 21, the RBI said, adding that there was an outflow of $16.8 billion by foreign portfolio investors (FPI) during the fiscal year, as against an inflow of $36.1 billion a year ago.

External commercial borrowings (ECBs) recorded an inflow of $7.4 billion in FY22 compared to $0.2 billion in FY21, when the corporates were in a de-leveraging mode.

There was an accretion of $47.5 billion to the foreign exchange reserves on a balance of payment basis in the fiscal year.

On a sequential basis, the narrowing of CAD in the March quarter was attributed by the RBI to moderation in trade deficit and lower net outgo of primary income.

Private transfer receipts, mainly representing remittances by Indians employed overseas, increased to $23.7 billion, up 13.4 per cent from their level a year ago, the RBI said.

The March quarter saw net foreign direct investment (FDI) at $13.8 billion as against $2.7 billion in the year-ago period, but the net foreign portfolio investment (FPI) recorded an outflow of $15.2 billion driven mainly by equity market pullouts.

There was a drawdown of $16 billion in the foreign exchange reserves on a BoP basis in the March quarter, as against an accretion of $3.4 billion in the year-ago period, the RBI said.