India’s current account gap widens to nine-year high

India's current account deficit widened in the July-September quarter as high commodity prices and a weak rupee increased the country's trade gap, data from the Reserve Bank of India (RBI) showed on Thursday.

In absolute terms, the current account deficit (CAD) (INCURA=ECI) was $36.40 billion in the second quarter of fiscal year 2022/23, its highest in more than a decade. As a percentage of GDP, it was 4.4 per cent, its highest since the June quarter of 2013, according to Reuters.

The CAD was $18.2 billion, or 2.2 per cent of GDP, in the preceding April-June quarter, while the deficit was $9.7 billion, or 1.3 per cent of GDP, in the same quarter a year earlier, the release showed.

In a statement, the RBI linked the widening deficit to the increase of "the merchandise trade deficit to $83.5 billion from $63.0 billion in Q1 2022/23 and an increase in net outgo under investment income".

In its Financial Stability Report released after the data, it said the widened trade deficit reflected "the impact of slowing global demand on exports, even as growth in services exports and remittances remained robust".

The median forecast of 18 economists in a Dec 5-14 Reuters poll was for a $35.5 billion CAD in the July-September quarter.

The RBI said services exports reported growth of 30.2 per cent on a year-on-year (y-o-y) basis, driven by exports of software, business and travel services, while net services receipts increased sequentially and y-o-y.

Private transfer receipts, mainly representing remittances by Indians employed overseas, rose by 29.7 per cent to $27.4 billion from a year earlier.

The country's balance of payments (INBOP=ECI) recorded a deficit of $30.4 billion compared to a $31.2 billion surplus in the same quarter a year earlier.

Aditi Gupta, economist with Bank of Baroda, said the CAD had probably peaked but risks remained.

"Slowing global growth entails both merchandise as well as services exports will remain muted," she said.

Steady net inflows of foreign direct investment and the resumption of portfolio flows since July 2022 indicate the CAD will be comfortably financed, the RBI said in the Financial Stability Report.

Madhavi Arora, lead economist at Emkay Global Financial Services said net investment income will continue to weigh given higher interest rates abroad and forecast CAD at 3.4 per cent of GDP for the full year 2022/23.