India's current account deficit narrows to 0.7% of GDP in FY24; Q4 shows 0.6% surplus

Current account deficit narrows

India’s current account deficit moderated to 0.7% of the GDP in FY24, compared with 2% in the previous years, on account of higher services trade and greater net portfolio inflows before India’s inclusion in the global bond index, data released by the Reserve Bank of India showed on Monday.

The current account deficit for FY24 declined to $23.2 billion from $67 billion in the previous fiscal, as the current account turned positive in the last quarter of the year to 0.6% of the GDP or $5.7 billion.

In the year-ago period, the current account deficit stood at 0.2% of the GDP.

Economists contend there is likely to be some slippage in CAD in FY25 to above 1% levels, but it is likely to stay manageable.

“For FY25, going by the early trends, the CAD should be manageable at 1-1.5% of GDP, and the steady capital inflows should ensure that the balance of payments which reflect the fundamentals remain comfortable,” said Madan Sabnavis, chief economist, Bank of Baroda.

This is expected to keep rupee steady between 83-84 against the dollar, Sabnavis further added.

India is likely to witness an infusion of $20-25 billion of capital owing to its inclusion in the global bond index. The country will be included in the GBI-EM Index suit on June 28.

Rising services exports

While the merchandise trade deficit narrowed compared with the previous year, net services trade was up nearly $20 billion during this period.

“Services exports grew by 4.1 per cent on a y-o-y basis in Q4:2023-24 on the back of rising exports of software, travel and business services. Net services receipt at US$ 42.7 billion was higher than its level a year ago (US$ 39.1 billion), which contributed to the surplus in the current account balance during Q4:2023-24,” RBI noted.

Remittances were up 11.9% in the last quarter from $28.6 billion in Q4FY23, whereas portfolio inflows turned positive to $11.4 billion in the last quarter of FY24 compared with an outgo of $1.7 billion a year before.

For FY24, portfolio investment recorded a net inflow of $44.1 billion as against $5.2 billion outflow in the previous year.

“In the run-up to the inclusion of Indian bonds in the JP Morgan bond index, there were long positions taken by investors in the market, thus pushing up debt inflows,” Sabnavis noted.

“Net FDI inflow was $9.8 billion during 2023-24 compared to $28.0 billion in 2022-23. This slowdown can be attributed to lower flow of funds from developed countries to emerging markets,” he further added.

A recent report by UNCTAD shows that India slipped to 15 in the Global FDI ranking in 2023.