India's current account deficit is now seen falling below $100 billion for 2022-23 after two powerful factors moved in tandem in January.
Last month, India's goods exports contracted again, this time by 6.6 percent on a year-on-year basis to $32.9 billion, while imports also fell.
Merchandise imports in January were down 3.6 percent at $50.7 billion. This resulted in a trade deficit of $17.8 billion — sharply lower than the $22.1 billion in the last month of 2022, but marginally higher than the January 2022 figure of $17.3 billion.
Meanwhile, provisional data showed services exports were nearly 50 percent greater in January at $32.2 billion, while imports rose 19 percent to $15.8 billion.
All in all, India posted a record services trade surplus of $16.5 billion in January.
"We see CAD (current account deficit) easing from hereon, led by the incrementally improving trade deficit amid receding commodity prices, especially for oil (with India also getting Russian crude at discount)," noted Madhavi Arora, lead economist at Emkay Global Financial Services.
Arora sees India's "solid" services trade surplus "strongly" offsetting the merchandise trade deficit, likely resulting in a current account deficit of $90 billion for 2022-23, down from her previous estimate of $107 billion.
India's current account deficit in 2021-22 stood at $38.8 billion. However, Russia's invasion of Ukraine in late February 2022 led to a massive surge in global commodity prices and pushed the import bill up to record highs.
In the July-September period — the quarter for which the latest data is available — India's current account deficit surged to an all-time high of $36.4 billion.
To be sure, even the reduced estimates for this year's current account deficit will be a record for India, with the current high being $88.2 billion in 2012-13.
Emkay's Arora isn't the only one to lower their estimate for this year's current account deficit after the January trade data. Rahul Bajoria, chief India economist at Barclays, has cut his forecast to $95 billion from $105 billion.
Bajoria pointed at goods imports contracting for the second month in a row in January, driven by a 71 percent slump in gold imports to $697 million.
"Non-oil, non-gold imports remained weak at $33.7 billion in January, suggesting easing commodity costs and somewhat lower demand for exports. We expect this trend to carry on, and the continued decline in global commodity prices will only help with a more rapid consolidation of imports," Bajoria added.
Nomura's Aurodeep Nandi and Sonal Varma also pointed out that a growth slowdown in India was contributing to the fall in imports, with domestic economic data for January suggesting consumption and investment demand "have largely plateaued, while the services sector has been sequentially slowing".
Nandi and Varma added that the faster narrowing of the trade deficit implied "the pace of deceleration in imports is exceeding that of exports, suggesting the drag from lower commodity prices and weaker domestic growth is more than that from lower exports".
As such, Nomura sees a downside risk to its current account deficit forecast of $100.6 billion for 2022-23 if the deficit remains similarly low in February and March.
However, economists also warned that January's trade deficit relief could be temporary.
"We believe China's extended New Year holidays in January could have provided a temporary disruption to external trade since this was the first instance in four years for Chinese citizens to enjoy the holidays amidst easing of COVID restrictions," wrote economists from QuantEco Research.
This could mean trade with China resuming in full swing in February as the world's second-largest economy continues to come out of lockdown restrictions. The result, QuantEco Research added, would be a widening of India's trade deficit as "normalisation of import demand could outweigh the normalisation of export demand from China".
QuantEco Research has maintained its current account deficit forecast of $106 billion for 2022-23, although it sees a chance of it being undershot due to favourable revisions in the data, with the merchandise trade deficit for the first three quarters of the financial year now pegged at $215.5 billion, down from the provisional estimate of $228.8 billion.