Overview

India’s current account deficit expectedly, swelled to a 37-quarter high of USD 36.4 bn (4.4% of GDP) in Q2 FY23 from USD 18.2 bn in Q1 FY23 (2.2% of GDP). The resulting net balance of payments (BoP) position registered a deficit of USD 30.4 bn (3.7% of GDP), its weakest since the 2008 Global Financial Crisis; compared to a surplus of USD 4.6 bn in Q1 FY23.

Highlights of Q1 FY23 Data

·     The deterioration in current account balance was primarily due to the sharp expansion of merchandise trade deficit to USD 83.5 bn in Q2 FY23 - the highest level of trade deficit since the 2013 Taper Tantrum episode, from USD 63.0 bn in Q1 FY23. This was despite invisibles surplus improving to a fresh record high of USD 47.2 bn in Q2 FY23 from USD 34.8 bn in Q2 FY22:

o    The widening of trade deficit can be attributed to sharp increase in imports, as exports moderated in the quarter.

o     Total imports increased to USD 195.5 bn from USD 185.8 bn in Q1 FY23 led by higher oil imports (+USD 5.8bn QoQ) as crude oil prices touched a 37-quarter high level of USD 112 pb on average in Q2 FY23. Even, non-oil-non-gold imports remained resilient at USD 126.5bn (+USD 6.6bn QoQ) owing to strength in domestic demand amidst reopening of the economy.

o     Exports slowed down in Q2 FY23 to USD 112 bn compared with USD 122.8 bn in Q1FY23, amidst administrative restrictions on select exports and incremental slowdown in global demand.

o    Uptick in invisibles was led by – 1) improvement in software exports aided by the traction towards digitization which continues to push demand for India’s IT exports that stood at a 36-quarter high of 4.2% of GDP 2) Private transfers at USD 24.8 bn registering gains with net inflow of 3.0% of GDP, a 9-quarter high. 

·     Capital account surplus narrowed to USD 6.9 bn (0.8% of GDP) in Q2 FY23 from a record high of USD 39.6 bn (5.2% of GDP) a year ago and USD 22.1 bn in Q1 FY23 (2.6% of GDP).

o    The downside was led by a sharp swing in banking capital, recording an outflow of USD 8.4bn in Q2 FY23 as against an inflow of USD 19 bn in Q1FY23.

o    In addition, net FDI inflows decreased sharply to USD 6.4 bn in Q2 FY23 from USD 13.6 bn in Q1 FY23.

o    Cushioning the downside, FPIs became net buyers in Q2FY23 with an inflow of USD 6.5 bn compared with an outflow of USD 14.6 bn in Q1FY23. 

Outlook

The simultaneous widening of the current deficit balance along with narrowing of the capital account surplus seen in Q2 FY23, was a concern as it pushed the BOP position into a sizeable deficit.

Heading into the new quarter, we however, believe that the peak discomfort on BoP is now behind us -

• Moderation in global commodity prices in last 5-months has led to lowering of monthly trade deficit run-rate, averaging at USD 25.7 bn in Q3 FY23 down from USD 28.0 bn in Q2 FY23.

• Despite a hostile global environment, the outlook on services exports remains bright as they continue to scale new highs.

• With key central banks now gradually pivoting towards less aggressive rate hikes due to moderation in inflation, portfolio investor sentiment appears to be stabilizing.

However, amidst an uncertain geopolitical environment and slowing global growth, risks will remain on both current account balance and capital flows.

Keeping in mind the H1 BoP outcome, along with the moderation in crude oil prices in Q3 FY23, we now revise our forecast for FY23 current account deficit to 3.1% of GDP (USD 106 bn) from 3.7% (USD 130 bn) earlier. From BoP perspective, we now anticipate the deficit to be marginally lower at 1.1% of GDP (USD 38 bn) from 1.7% (USD 60 bn) earlier. 

Table 1: Key items within India’s BoP