India’s Current Account Balance (CAB) turned back into a deficit of USD 9.8 bn or 1.1% of GDP in Q1FY25 after registering a surplus of USD 4.6 bn or 0.5% of GDP in Q4FY24 (revised lower from USD 5.7 bn previously). This was led by a significant expansion of the trade deficit amidst a broad-based moderation in exports as well as invisibles, accompanied by an increase in imports.

Capital flows turned weaker in Q1 FY25, coming in at USD 14.4 bn compared to USD 25.6 bn in Q4FY24. This was largely on account of lower net investment flows (mostly portfolio flows) as well as banking capital. As such, the Balance of Payments (BoP) surplus moderated to USD 5.2 bn in Q1 FY25 (i.e., 0.6% of GDP) from an upbeat USD 30.8 bn in Q4 FY24 (i.e., 3.3% of GDP). 

Key granular highlights 

From a sequential perspective:

• Merchandise trade deficit widened to USD 65.1 bn in Q1 FY25 from USD 52.0 bn in Q4 FY24. This was an outcome of exports contracting by 8.6%QoQ (led by both oil and non-oil exports), alongside an increase in imports by 1.5%QoQ (led by oil and NoNG, as gold imports were largely unchanged vis-à-vis previous quarter)
• Net inflow on Invisibles moderated marginally to USD 55.4 bn in Q1 FY25 from USD 56.6 in Q4 FY24, owing to a deceleration in Services as well as Transfers, even as net outflows on Income eased marginally. 
  1. On a positive note, net inflows in software services continued to scale new highs at USD 37.4 bn in Q1 FY25, defying expectations of a slowdown amidst a moderating global growth momentum. 
• On the capital account, the surplus moderated to USD 14.4 in Q1 FY25 (i.e., 1.6% of GDP) from USD 25.6 bn in Q4 FY24 (i.e., 2.7% of GDP). The downside in net inflows on the capital account was led by -
  1. Net FPI moderating to a paltry USD 0.9 bn in Q1FY25 vs. USD 11.4 bn in Q4FY24. While net debt flows were positive, net equity flows were negative in Q1FY25, mostly due to global risks and uncertainties.
  2. Net banking capital flows waned to USD 2.9 bn vs USD 6.9 bn in Q4FY24

On the other hand: 

1. Net FDI flows came in higher at USD 6.3 bn vs USD 2.3 bn in Q4FY24.
2. Loans rose from USD 3.9 bn in the previous quarter to USD 6.0 bn in Q1 FY25, led by an increase in ‘Short term credit’ even as external assistance fell marginally. 

Outlook

The outlook on India’s BoP will likely be impacted by evolving pulls and pressure, which will warrant a close watch. 

On the CAD front,

• The expansion of the trade deficit is expected to continue into Q2 FY25, evident from monthly data available from the Ministry of Commerce for the months of Jul-Aug-24 so far. The USD 29.7 bn trade gap in Aug-24 – i.e., at a 10-month high, was led by a sharp increase in gold and related imports following the reduction in import duties announced in the Union Budget in Jul-24. 
• This, along with domestic growth resilience, will likely be aided further by a normal monsoon outcome supporting rural demand recovery, which could keep NoNG imports somewhat elevated. 
• However, the softness in international commodity prices (notwithstanding geopolitical concerns) particularly crude prices could prove to be supportive. 
• Positive momentum in the services trade surplus continues to prevail, with post-Covid acceleration in business and financial services along with the recent pick-up in international travel. 

From a capital account perspective: 

• Q2FY25 portfolio flows have seen a significant turnaround, with net inflows close to USD 19 bn. Debt market flows on account of India’s inclusion in the JP Morgan bond index are likely to be sustained. 
• Expectation of aggressive easing of US monetary policy (post the 50 bps rate cut in Sep-24, the futures market expects a cumulative 200 bps of rate cut by the end of 2025) and a stable INR could make external loans attractive. 
• While FDI inflows were subdued in FY24 and Q1 FY25, they could potentially improve somewhat in FY25 as investors assess the impact of political and policy continuity post the national elections. 

Considering the above factors, we revise our FY25 current account balance to -1.2% of GDP (USD -45 bn) vis-à-vis our earlier forecast of -0.9% (USD 34 bn) with upside risk. Taking into account the momentum in capital flows since Q2 FY25, we retain our FY25 BoP forecast at 1.3% of GDP (USD 50 bn).

Chart 1: The expansion in trade deficit has continued well into Q2 FY25

Table 1: Key items within India’s BoP