New Delhi: India’s Current Account Deficit (CAD) is expected to rise above 2 per cent of GDP in the third quarter of FY25, driven by a surge in gold imports, according to a report by Bank of Baroda. However, resilient services exports and remittance inflows are likely to cushion the overall impact, keeping the CAD for FY25 within a manageable range of 1.2 per cent-1.5 per cent of GDP.
India’s CAD narrowed slightly to 1.2 per cent of GDP in Q2 FY25, compared to 1.3 per cent in the same period last year. Higher CAD is also because of increased trade deficit, the merchandise trade deficit widened to USD 75.3 billion in Q2 FY25 from USD 64.5 billion in Q2 FY24.
The increase was largely attributed to higher non-oil imports, with gold imports rising by USD 5 billion year-on-year.In contrast, the services sector emerged as a bright spot, with net services balance increasing to USD 44.5 billion in Q2 FY25, up from USD 39.9 billion in the previous year.
Software and business services exports were particularly strong, while private remittances grew to USD 29.3 billion, further supporting CAD containment.On the capital account front, India recorded a surplus of USD 11.9 billion in Q2 FY25, compared to USD 10.3 billion in Q2 FY24. The sharp rise in Foreign Portfolio Investment (FPI) inflows, which surged to USD 19.9 billion from USD 4.9 billion last year, played a key role.
Non-resident Indian (NRI) deposits and External Commercial Borrowings (ECBs) also contributed positively, offsetting increased Foreign Direct Investment (FDI) outflows.Overall, the balance of payments (BoP) recorded a significant surplus of USD 18.6 billion in Q2 FY25, up from USD 2.5 billion in the same period last year, supported by robust capital inflows.
The report highlighted that sluggish FPI inflows in recent months, coupled with a stronger US dollar, are likely to exert pressure on the Indian rupee. Bank of Baroda expects the rupee to trade in a range of 84-85.5/USD in the near term.
The surge in November 2024’s trade deficit, primarily driven by gold imports, is seen as a one-off event. However, the Bank of Baroda flagged potential risks, including the possibility of protectionist trade policies under the incoming US administration. Despite these concerns, resilient services exports and remittance inflows are expected to keep CAD levels manageable for FY25.
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