India's March quarter CAD at $1.3 billion, $67 billion for FY23

The sharp fall in the current account deficit was primarily due to a reduction in India’s trade deficit.

India's current account deficit (CAD) fell to just $1.3 billion in the January-March period, data released by the Reserve Bank of India (RBI) on June 27 showed, helped by cooling oil prices and a booming services sector.

The $1.3 billion deficit for the last quarter means India recorded a current account deficit of $67 billion in the financial year 2022-23 against a deficit of $38.7 billion in 2021-22.

India's current account deficit stood at $17.9 billion in April-June 2022, $30.9 billion in July-September 2022, and $16.8 billion in October-December.

"The sequential decline in CAD in January-March 2023 was mainly on account of a moderation in the trade deficit to $52.6 billion in January-March 2023 from $71.3 billion in October-December 2022, coupled with robust services exports," the RBI said in a statement.

India's overall trade deficit has fallen for two reasons. While cooling global oil prices have helped — the price of India's crude basket fell to $80.6 a barrel in the last quarter of 2022-23 from $85.8 in October-December 2022 and from $97.9 in July-September 2022 — services trade has boomed.

As per the data, India had a services trade surplus of $39.1 billion in January-March 2023, an all-time high.

As a percentage of GDP, the January-March 2023 CAD is 0.2 percent compared to 2 percent in October-December 2022 and 1.6 percent in January-March 2022.

For 2022-23, the CAD amounts to 2 percent of GDP, up from 1.2 percent in 2021-22, the RBI said.

India's external balance has improved rapidly in the second half of 2022-23, forcing economists to make multiple downward revisions to their estimates for the current account deficit. In 2023-24, the deficit is seen falling even lower to sub-$50 billion levels.

"Current account dynamics are expected to improve on average in the current year," noted Rahul Bajoria, managing director and head of EM Asia (ex-China) Economics at Barclays.

"We forecast the current account deficit to print lower in 2023-24: both export and import values are expected to soften owing to weak external demand and lower international commodity prices - leading to a narrower goods trade deficit compared to the previous fiscal year. We think a larger boost to the current account balance will come from a robust services trade surplus," he added.

Bajoria expects the current account deficit to fall to $40 billion, or 1.1 percent of GDP, this year and increase slightly to 1.2 percent of GDP in 2024-25.

The current account balance – whether in deficit or surplus – is a key indicator of the external health of an economy. India, being a net importer, is expected to have a deficit, though certain quarters can see it posting a surplus, as was the case in April-June 2021 when a sharp fall in imports meant the current account was in a surplus of $6.6 billion. However, an excessively large CAD can be detrimental to an economy as it can lead to currency depreciation.

Broadly, for India, a current account deficit of up to 2.5-3 percent of GDP is seen as acceptable.