Economy

Published: June 28, 2023
Updated: June 28, 2023

India's Current Account Deficit Narrows in Q1 2023 as Trade Gap Shrinks: RBI

India's current account deficit (CAD) in the January-March quarter of FY23 has shown a significant improvement, primarily driven by a reduction in the trade deficit and a notable increase in services exports, according to data released by the Reserve Bank of India (RBI). The CAD narrowed to USD 1.3 billion, accounting for 0.2 percent of GDP during this period. However, for the full fiscal year 2022-23, the CAD stood at 2 percent of GDP, compared to 1.2 percent in the previous year.

Moderation in Trade Deficit and Robust Services Exports:

The RBI's report highlights that the decline in CAD during the fourth quarter of 2022-23 can be attributed to a moderation in the trade deficit, which decreased from USD 71.3 billion in the previous quarter to USD 52.6 billion. Additionally, robust growth in services exports, particularly in net earnings from computer services, contributed to the positive trend.

Increase in Net Services Receipts:

Net services receipts experienced sequential and year-on-year growth, primarily driven by a rise in net earnings from computer services. This increase in net services receipts played a crucial role in narrowing the current account deficit.

Private Transfer Receipts and Financial Account:

Private transfer receipts, which mainly consist of remittances by Indians employed overseas, saw a substantial increase of 20.8 percent year-on-year, reaching USD 28.6 billion in the January-March period. In the financial account, net foreign direct investment (FDI) amounted to USD 6.4 billion, higher than USD 2.0 billion in the previous quarter but lower than the corresponding period last year (USD 13.8 billion).

Net foreign portfolio investment (FPI) recorded an outflow of USD 1.7 billion, primarily driven by the equity segment, compared to an outflow of USD 15.2 billion during the same period in the previous year. Net external commercial borrowings (ECBs) to India showed an inflow of USD 1.7 billion, contrasting with an outflow of USD 2.5 billion in the third quarter of 2022-23 and an inflow of USD 3.3 billion in the final quarter of 2021-22.

Foreign Exchange Reserves and Overall Balance of Payments:

India's foreign exchange reserves, on a balance of payments basis, experienced an accretion of USD 5.6 billion in the fourth quarter of 2022-23, compared to a depletion of USD 16 billion in the same period the previous year. Furthermore, the overall balance of payments for the fiscal year 2022-23 reveals a CAD of 2.0 percent of GDP, with the trade deficit widening to USD 265.3 billion from USD 189.5 billion in the previous year.

The latest data from the RBI demonstrates a positive trend in India's current account deficit for the January-March quarter of 2022-23, driven by a reduced trade deficit and increased services exports. While the full fiscal year witnessed a higher deficit compared to the previous year, the moderation in CAD during the last quarter indicates improvements in India's balance of payments. The rise in net services receipts and private transfer receipts, along with the inflow of foreign direct investment, further contribute to the overall stability of India's economic indicators.