Q3FY24 Current Account Deficit narrows 38% yoy to $10.5 Billion

27 Mar 2024 , 09:40 AM

CAD MODERATES YOY IN Q3FY24, WIDENS QOQ

The third quarter current account deficit (CAD) data has been announced by the RBI at $10.5 Billion or 1.2% of the GDP. Even for the 9 months of FY24, the CAD remains at a very encouraging 1.2% of the GDP, which can be seen as a reasonable position to be in at the end of 9 months. Typically, the RBI reports the CAD with a lag of one quarter i.e., the September quarter CAD gets reported towards the end of December, and the December 2023 CAD, just got reported towards the end of March 2024. The current account deficit has acquired one more significance in recent years. While merchandise trade deficit continues to be a sore point for India, there is an encouraging shift. While the merchandise trade deficit has seen a positive shift towards PLI imports, the redeeming feature is the surge in the services surplus in the last few months. In the first two months of 2024, the services surplus has almost wiped out the merchandise deficit, but we will get that picture only in end-June.

For the December 2023 quarter (Q3FY24), the current account deficit (CAD) was reported at $10.5 Billion, which is sharply lower on a yoy basis, but moderately higher on QOQ basis. Most of the pressure in the third quarter came from the month of October, when India had reported a record merchandise trade deficit of over $31 Billion. That is, probably, is what has distorted the picture a bit in this quarter. The CAD, incidentally, is an extension of the trade deficit. While the trade deficit only includes the merchandise trade in goods, the CAD also includes trade in services and provision of outsourcing services like audit, legal and even through global capability centres (GCC). For instance, a spike in the price of crude oil can have a deep impact on CAD. In recent months, the Red Sea situation has continued to fester and that is keeping global trade perpetually on tenterhooks.

HOW CAD PANNED OUT OVER LAST 12 QUARTERS

The table captures the current account balance trend for the last 12 sequential quarters.

Quarter	Current Account Balance
Quarter Ended March 2021	$(8.1) Billion
Quarter Ended June 2021	$6.58 Billion
Quarter Ended September 2021	$(9.71) Billion
Quarter Ended December 2021	$(22.16) Billion
Quarter Ended March 2022	$(13.40) Billion
Quarter Ended June 2022	$(18.00) Billion
Quarter Ended September 2022	$(30.90) Billion
Quarter Ended December 2022	$(16.80) Billion
Quarter Ended March 2023	$(1.30) Billion
Quarter Ended June 2023	$(9.20) Billion
Quarter Ended September 2023	$(8.30) Billion
Quarter Ended December 2023	$(10.50) Billion

Data Source: RBI

Here are some of the major takeaways from the time series data on current account deficit for the last 12 quarters.

• The current account deficit had peaked at $30.9 Billion in the September 2022 quarter, which is when the government had expressed concerns about a possible spike in the CAD for FY23. However, CAD has been kept in check since then. In fact, CAD has been in single digits for 3 quarters in a row now.
• The restrained CAD in the last 3 quarters can be largely attributed to factors like Russian oil imports, fall in global commodity prices and a surge in the service surplus. Also, the conscious import substitution policy adopted by the government and the Made in India policy have been very effective in curbing imports. Imports of gold have been a bane in recent months, but things should change with the hike in customs duty on gold to 15%.
• At $10.5 Billion for the December 2023 quarter, the current account deficit or the CAD is just about 1.2% of GDP. This is lower than the current account deficit reported in the year-ago quarter, but it is higher than the sequential September 2023 quarter. This can be attributed to the spike in the merchandise trade deficit to record levels of $31.5 Billion in October last year. That has impacted the Q3 numbers, and that was about gold.
• What helped reduce the current account deficit in the December 2023 quarter to $10.5 Billion, compared to $16.8 Billion in December 2022 quarter? On yoy basis, even though merchandise trade deficit is flat, the POL deficit is sharply lower. At the same time, the surplus on services account was meaningfully higher at $45.0 Billion in the December 2023 quarter as compared to just $38.7 Billion in the December 2022 quarter. The overall impact on FY24 CAD levels is likely to be positive.

HOW CAD BASKET SHIFTED YOY IN DECEMBER 2023 QUARTER?

Pressure on Current Account	Q3 FY24 Break-up	Q3 FY23 Break-up	Boost to Current Account	Q3 FY24 Break-up	Q3 FY23 Break-up
Trade Deficit	($71.60 bn)	($71.30 bn)	Services Surplus	+$45.00 bn	+$38.70 bn
Primary A/C – Interest	($13.20 bn)	($12.70 bn)	Secondary Income	+$29.30 bn	+$28.50 bn
Negative Thrust on CA	(-$84.80 bn)	(-$84.00 bn)	Positive Thrust on CA	+$74.30 bn	+$67.20 bn
			Current Account Deficit (CAD)	(-$10.50 bn)	(-$16.80 bn)

Data Source: RBI

The current account deficit for the December 2023 quarter was sharply lower on a yoy basis, but slightly higher on a sequential basis. Here are the components of December 2023 CAD compared with December 2022 quarter.

• Firstly, the merchandise trade deficit was almost flat at $(71.6) Billion in the December 2023 quarter. This compares with $(71.3) Billion CAD in the year-ago quarter. However, the trade deficit was sharply higher than the first and second quarters of FY24. This is largely on account of the discount on Russian oil imports compressing sharply amidst the global Brent Crude prices getting closer to $90/bbl. The higher trade deficit can also be attributed to pressure on exports as there is the impact of the global slowdown expectations as well as fears of the Red Sea crisis escalating.It is interesting to see how the Red Sea crisis is having an impact on the merchandise trade deficit. In fact, it is impacting in multiple ways. The last quarter has seen a spike in the price of oil and that is reflected. Also, the October effect had seen a spike in the demand for gold imports. Above all, there is a bigger problem for the trade to confront. Due to persistent attacks on cargo ships by the Houthi rebels, most of the large liner groups are now taking the Horn of Africa route. That is not only delaying deliveries by 10-12 days, but it is also making freight and insurance costs higher. It is almost like a double whammy.
• The big story in December 2023 (Q3FY24) quarter was the growth in services surplus to an all-time high on a quarterly basis. Here is a look at the services trade surplus in the last 4 sequential quarters. The services surplus in the year ago quarter was at $38.7 Billion and in comparison the services surplus has grown really sharply. The services surplus is also sharply higher compared to the previous two quarters also.
• Primary outflows on account of payments on investments in the form of interest and dividends increased yoy from $12.7 Billion in Q3FY23 to $13.2 Billion in Q3FY24. This is on account of higher pay-outs on in-bound investments amidst rising inflows from FDI and FPI flows. The secondary income has been largely stable on a yoy basis.

Overall, the trends from the CAD story appear to be encouraging for the December  2023 quarter. The full year current account deficit for FY23 stood at $67 Billion; sharply lower than the expected range of $100 Billion to $125 Billion. For the current fiscal FY24 the current account deficit for the first 9 months stands sharply lower at $31.0 Billion. Even in a worst case scenario, it is unlikely that the full year current account deficit should cross $37-$39 Billion. That would just be a tad above 1%. If there are positive surprises in the fourth quarter, then it would be icing on the cake.

HOW CUMULATIVE CAD BASKET SHIFTED FOR FIRST 9 MONTHS OF FY24

Pressure on Current Account	9M FY24 Break-up	9M FY23 Break-up	Boost to Current Account	9M FY24 Break-up	9M FY23 Break-up
Trade Deficit	($192.8 bn)	($212.7 bn)	Services Surplus	+$120.1 bn	+$104.2 bn
Primary A/C – Interest	($35.4 bn)	($33.3 bn)	Secondary Income	+$77.1 bn	+$76.2 bn
Negative Thrust on CA	(-$228.2 bn)	(-$246.0 bn)	Positive Thrust on CA	+$197.2 bn	+$180.4 bn
			Current Account Deficit (CAD)	(-$31.0 bn)	(-$65.6 bn)

Data Source: RBI

With the data available for the 3 quarters of FY24, here is a comparison of the current account basket for the first 9 months of FY24 vis-à-vis the first 9 months of FY23.

• For the first 9 months of FY24, the merchandise trade deficit narrowed yoy to $192.8 Billion compared to $212.7 Billion in first 9 months of FY23. This can be attributed to the discount on Russian oil imports, as Russia had emerged as the largest contributor to the Indian oil basket. The fall in merchandise trade deficit was also partially on account of lower commodity prices and weak import numbers.
• What is more interesting is that the POL (petroleum, oil, lubricants) deficit accounted for 35.4% of the merchandise trade deficit in the first 9 months of FY24. In contrast, the POL deficit accounted for 40% of the merchandise trade deficit in the first 9 months of FY23 . This also means that while the oil driven deficit has fallen, the gains are narrowing. However, there is deficit being created by other commodity classes.
• The more interesting story in first 9 months of FY24 was the growth in services surplus. The service surplus for 9M-FY24 stood at $120.1 Billion compared to just $104.2 Billion in the year ago period of FY23. This is despite the fact that the services surplus also had a small setback on account of the weak tech demand from the US amidst cuts in expenditure. This appears to have changed with robust US growth data.
• Primary outflows on account of payments on investments in the form of interest and dividends increased to $35.4 Billion in 9M-FY24 as compared to $33.3 Billion in H1FY23. This is on account of higher pay-outs on in-bound investments amidst rising inflows from FDI and FPI flows. The secondary income has been flat on a yoy basis.

The 9M-FY24 CAD at $(31.0) Billion is sharply lower compared to $(65.6) Billion in 9M-FY23. While it may be too early to extrapolate, it looks like the CAD should stay around 1.0% to 1.2% of GDP for the full year FY24, even in a worst-case scenario. That should come as manna from heaven for the Indian rupee as well as for the sovereign rating agencies looking at the India CAD closely.

HOW WILL 9M-FY24 CAD SHAPE GOVERNMENT POLICY?

After the record merchandise trade deficit of $31.5 Billion in October 2023, the government has been working on a war footing to bring CAD under control. Higher CAD is not only negative for the sovereign ratings, but it is also inflationary as it could impute a lot of imported inflation into India. So, what is the government of India doing. One side of the approach is the big boost to exports. One has to only look at the wonders that India has done to emerge as the preferred iPhone manufacturer for Apple Inc. India’s mobile phone production for exports has grown by leaps and bounds. In addition, the government is also pursuing a policy of import substitution and Make in India to reduce the import content in India’s trade basket through organic means.

The one major X-factor could be the rupee value, which recently showed a lot of volatility when the Pound and Euro had weakened against the dollar. While RBI members in the MPC are still hawkish, the RBI has held policy rates for the last 6 meetings since February 2023. The services trade surplus, restrained CAD and the persistent FPI flows have kept the Indian rupee at a robust level. However, the RBI is unlikely to take any rate decision for now. Most likely, it would wait for the elections to get over, a new government to be in place and the full budget to be presented. Any RBI action on rates looks likely post-July only.