In the fourth quarter of FY23, India witnessed a significant reduction in its current account deficit, which narrowed down to $1.3 billion, equivalent to 0.2% of the GDP. However, during the entire financial year FY23, there was an expansion in the trade deficit, reaching $265.3 billion compared to $189.5 billion in the previous year.
The current account deficit (CAD) of the country, which measures the disparity between exports and imports of goods and services, contracted to 0.2% of gross domestic product (GDP) in the fourth quarter of fiscal year 2022-2023. This marked a decline from the preceding quarter’s CAD of 2%.
However, the CAD for the entire fiscal year 2022-2023 expanded to 2% of GDP, compared to 1.2% in FY2022, as per recent data released by the Reserve Bank of India (RBI).
Now, let’s understand what Current Account Deficit (CAD) entails. The CAD serves as a crucial indicator of a country’s external sector. It represents the situation when the value of imported goods and services surpasses the value of exported products. Alongside the fiscal deficit, which denotes the government’s borrowing to bridge the gap between its expenditures and revenues in a given year, the CAD forms part of the “twin deficits.” These twin deficits are perceived as detrimental factors by the stock market and investors.
When the current account, which encompasses a country’s trade and transactions with other nations, exhibits a surplus, it indicates an inflow of money into the country. This inflow enhances foreign exchange reserves and strengthens the value of the domestic currency against the US dollar. These factors have implications for the economy, stock markets, and investment returns.
In the fourth quarter of FY2022, the current account deficit (CAD) experienced a significant reduction. It narrowed down to $1.3 billion, equivalent to 0.2% of GDP, in the January-March period of FY2023. This marks a notable decrease from the preceding quarter’s CAD of $16.8 billion, or 2% of GDP. In the fourth quarter of FY2022, the CAD stood at $13.4 billion, or 1.6% of GDP.
According to the RBI, the decrease in the current account deficit (CAD) during the fourth quarter of fiscal year 2022-2023 was primarily driven by a reduction in the trade deficit. The trade deficit decreased from $71.3 billion in the third quarter of FY2022 to $52.6 billion in the fourth quarter. Additionally, strong exports of services played a role in narrowing the CAD.
Remittances, which serve as the second largest source of external financing after service exports, also contributed to the CAD reduction. In the quarter, private transfer receipts, primarily representing remittances from Indians working abroad, increased to $28.6 billion, marking a 20.8% rise compared to the previous year.
According to , Senior Economist at DBS Group Research, the narrowing of the current account deficit (CAD) in Q4 FY23 was aided by favorable terms of trade resulting from a correction in commodity prices, robust service trade, and resilient remittances.
During the quarter, net foreign direct investment (FDI) amounted to $6.4 billion. On the other hand, net foreign portfolio investment (FPI) witnessed an outflow of $1.7 billion in Q4 FY23, a significant improvement compared to the outflow of $15.2 billion in the same quarter of the previous year.
What does a lower CAD reflect?
A lower current account deficit (CAD) reflects a difference between investment and savings in a country. When a country has a CAD, it relies on foreign savings to finance that gap.
According to Dharmakirti Joshi, Chief Economist at Crisil Ltd., a lower CAD signifies that less money is required to bridge the financing gap. Additionally, it is considered a positive indication of the economy’s resilience. Having a low current account deficit makes a country less vulnerable to external economic shocks.
What happened to CAD in FY2023?
In FY2023, the current account deficit (CAD) widened to 2% of GDP, compared to a deficit of 1.2% in the previous fiscal year. This increase was driven by a trade deficit expansion, rising from $189.5 billion to $265.3 billion compared to the previous year.
Despite this, the CAD for FY2023 was contained at 2% of GDP, thanks to narrower external imbalances in the fourth quarter of FY23. This outcome defied market expectations of a shortfall exceeding 3-3.5% earlier in the year, when global commodity prices were rallying. Radhika Rao from DBS Group highlighted this development.
Will CAD narrow in FY24?
Looking ahead to FY24, experts anticipate a moderation in the current account deficit. Lower commodity prices and a substantial increase in portfolio flows during the April-June 2023 quarter are expected to support external balances, offsetting the impact of slower exports.
Bank of Baroda’s Economist, Aditi Gupta, stated that they anticipate further improvement in the current account deficit (CAD) due to lower commodity prices. They expect merchandise exports to remain subdued due to weakening global growth. As a result, they project the CAD for FY24 to be in the range of 1.2% to 1.6% of GDP.
Gupta also mentioned that a combination of a lower CAD and a stable or lower capital account would contribute to keeping the value of the rupee largely stable.