India’s Current Account Balance (CAB) recorded a surplus of USD 5.7 bn in Q4 FY24 (i.e., 0.6% of GDP) after a gap of 10 quarters, compared to a deficit of USD 8.7 bn in Q3 FY24. The swing in the CAB to a surplus was owing to the sharp constriction in the trade deficit in Q4, even as invisibles recorded a marginal decline. Capital flows strengthened to USD 24.5 bn from USD 15.0 bn in Q3 FY24 supported by portfolio flows, loans and miscellaneous capital. As such, the Balance of Payments (BoP) recorded a surplus of USD 30.8bn in Q4 FY24 (i.e., 3.3% if GDP) compared with a surplus of USD 6.0 bn in Q3 (0.7% of GDP), to push the FY24 BoP surplus to USD 64bn as against a deficit of USD 9 bn in FY23.

Key granular highlights 

From a sequential perspective –

• Merchandise trade deficit narrowed to USD 50.9 bn in Q4 from USD 70.0 bn in Q3 FY24. This was an outcome of a combination of exports registering a 14.1%QoQ expansion (led by both oil and non-oil exports), accompanied by imports contracting by 2.3%QoQ (led by non oil imports including gold).  
• Net inflow in Invisibles moderated to USD 56.6 bn in Q4 from USD 61.2 in Q3 FY24, owing to an across-the-board deceleration in Services (o/w business services, -USD 2.3 bn), Transfers (-USD 0.6 bn) as well as Income (-USD 1.7 bn). 
  1. However, net inflows in software services continued to scale new highs at USD 36.6 bn in Q4 FY24, defying expectations of a slowdown in the sector up till the end of FY24. 
• On the capital account, surplus rose to 2.6% of GDP (i.e., USD 25.5 bn) in Q4 from 1.6% of GDP (i.e., USD 15.0 bn) in Q3 FY24. The upside in net inflows on the capital account was led by -
  1. Net FPI flows remaining stable, at USD 11.4 bn in Q4 compared to USD 12.0 bn in Q3 reflecting the repositioning of global investors for the start of monetary easing by key central banks along with India’s maiden entry into the EM bond indices scheduled for end-Jun’24. 
  2. Loans swung from a deficit of USD 5.6 bn in the previous quarter to a surplus of USD 1.7 bn in Q4 FY24 with lesser premium on ECBs. 
  3. ‘Miscellaneous capital’ swung from a deficit of USD 11.7 bn in Q3 to a marginal surplus of USD 2.5 bn in Q4 FY24. 
  4. Weighing on capital flows –
     • Banking capital net inflows normalized from 6-quarter high of USD 16.4 bn in Q3 to USD 6.9 bn in Q4 FY24 
     • Net FDI inflows trickled further lower to USD 2.0 bn in Q4 FY24 from USD 4.0 in the previous quarter, continuing to underscore the elevated global economic uncertainties in the post Covid phase that is manifesting in the form of geopolitical conflicts, trade protectionism, etc.

For FY24: 

• FY24 witnessed a sharply lower CAD at USD 23 bn (i.e., 0.7% of GDP) compared to USD 67 bn (2.0% of GDP) in FY23, to mark its lowest level in the post Covid phase. The downside was led by a lower trade deficit at USD 242 bn in FY24 compared to USD 265 bn in FY23, along with higher receipts on invisibles (USD 219 bn vs. USD 198 bn in FY23). Notably, growth in both exports and imports contracted on an annualized basis, owing to lower commodity prices – with obviously the downside in imports overshooting that of exports. 
• The strength in capital flows, as the surplus soared to USD 86 bn in FY24 from USD 59.0 bn in FY23, was single-handedly driven by the surge in portfolio flows. Net portfolio inflows stood at USD 44 bn in FY24 compared to an outflow of USD 5 bn in FY23, induced by debt flows ahead of India’s inclusion in the EM bond indices more than offset the downside in FDI and ‘Miscellaneous capital’ on an annual basis. 
• As such, BoP surplus of 1.8% of GDP in FY24 i.e., USD 63.7 bn, marks the highest level in past 3 years and a reversal from a deficit of USD 9.1 bn posted in FY23. 

Outlook

The improved dynamics on current and capital account continue to provide stability to India’s BoP position. 

From CAD perspective, support accrues from:

• Moderation in international commodity prices notwithstanding the risks arising out of geopolitical conflicts
• Positive momentum in the services trade surplus continues to prevail amidst the growth exceptionalism seen in US economy. 

From Capital account perspective –

• Impending inclusion of India in EM bond indices has continued to spur debt portfolio inflows
• Globally, the expectation of monetary policy pivot by DM Central banks has supported equity portfolio flows
• After witnessing net outflow of USD 4.4 bn over Apr-May-24, FPI flows have recovered to USD 3.3 bn in Jun-24 so far, as election outcome signals broad political and policy continuity.
• While FDI inflows were subdued in FY24, it could potentially recover in FY25 as investors assess the impact of political and policy continuity.

Taking the above factors into account, we fine-tune our FY25 current account and balance of payment forecast to -0.9% of GDP (USD -34 bn) and 1.3% of GDP (USD 50 bn) respectively as compared to -0.7% and 1.8% in FY24.

Says Suman Chowdhury, Chief Economist and Head-Research, Acuité Ratings & Research “Lower trade deficit driven by the resilience in India’s merchandise exports and the healthy momentum in services exports have translated to a current account surplus in the last quarter of FY24 despite a relatively weak global economy. Given the vulnerability of the trade balance to geo-political risks and higher crude oil prices, we don’t expect the sustenance of such a surplus scenario in the subsequent quarters. However, the CAD is likely to stand somewhat lower in FY25 and accompanied by the buoyancy in capital flows amidst the inclusion of Indian bonds in global indices along with the impending Fed rate cuts, should continue to generate a BoP surplus for the economy. Nevertheless, we don’t expect the INR to see any material appreciation in the near term since RBI may continue to accumulate the reserves and maintain export competitiveness.”  

Table 1: Key items within India’s BoP

Chart 1: Foreign investment support from impending inclusion of India in EM bond indices