ICRA: India's current account deficit would climb to 5% in Q2 and 3.5% in FY23

7 Sep 2022 , 08:09 AM

India’s current account deficit (CAD) would rise to 5% of GDP in the third quarter due to a larger merchandise trade deficit, predicts a local rating agency, Icra. The trade deficit for August doubled to USD 28.7 billion as a result of an increase in imports of 36.8% and a decrease in export earnings of 1.2%.

“It is predicted that the current account deficit (CAD) would rise from the USD 30 billion estimated for Q1 FY23 to an all-time high of USD 41—43 billion in Q2 FY23. In Q2 FY23, it’s expected that the second-highest level since Q3 FY12 would broaden to 5% of GDP “The paper said.

ICRA stated that the monthly average trade deficit for the first two months of the quarter has trended higher at USD 29.3 billion compared to USD 23.5 billion in the June quarter, driven by strong domestic demand that increased imports while exports remained subdued due to worries about an international slowdown.

According to the study, the current account deficit (CAD) is expected to decrease to 2.7% of GDP due to reduced commodity prices and typically higher exports in the second half of the fiscal year. However, it also cautioned that the second half of fiscal year 23 might see a slowdown in export growth due to a probable worldwide recession (H2 FY23).

The agency projects that “the CAD is projected to widen to an all-time high of USD 120 billion (3.5%) of GDP) from USD 38.7 billion (1.2%) of GDP” in FY23, adding that the deficit will be less than the 4.8% experienced in FY13.

During the most recent round of the CAD widening, the local currency came under intense pressure. Due to the comeback of foreign portfolio investors (FPIs) stocks inflows, the agency forecast that the rupee will trade between 78.5 and 81 against the US dollar for the balance of the calendar year 2022, notwithstanding the uncertainties facing the world.

“While FX reserves have lost USD 45.4 billion in FY23 so far (until August 26, 2022), they still stand at a sizeable amount and are likely to prevent a disorderly devaluation of the Indian rupee,” the statement continued.

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