Worst of CAD behind India as economists cut forecasts after positive Q3 data

India's current account deficit fell more than expected to $18.2 billion – or 2.2 percent of GDP – in October-December, data released on March 31 showed. The deficit for July-September was lowered to $30.9 billion from an all-time high of $36.4 billion "due to downward adjustment in customs data," the Reserve Bank of India said.

This is the second time in 2023 that the outlook for India's external sector has been upgraded. In February, after data for January showed the merchandise trade deficit falling to $17.8 billion and services exports jumping almost 50 percent to $32.2 billion, economists cut their forecast for the 2022-23 current account deficit to under $100 billion.

The sharp fall in the CAD in the last quarter of 2022 was helped by a lower merchandise trade deficit, with the price of India's crude oil basket falling to $85.8 per barrel in October-December from $97.9 per barrel in July-September, as per data from the government's Petroleum Planning & Analysis Cell.

Boost from services, remittances

However, economists noted that lower commodity prices were not the sole driver of this decline.

"…more importantly (the fall in CAD) is backed by a robust performance of services exports and remittance inflows. Some of this would be sustainable in the near to medium term," said economists with QuantEco Research.

While India's merchandise trade deficit edged down to $72.7 billion from $78.3 billion in July-September, the services trade surplus rose to a record $38.7 billion from $34.4 billion.

Also aiding the improvement in the current account balance were remittances. Private transfer receipts – which mainly include remittances by Indians working overseas – jumped 32 percent year-on-year in October-December to $30.8 billion on a gross basis, the RBI pointed out last week.

"The strong performance of private transfers even during periods of low crude oil prices reflects the reducing share of remittances from GCC (Gulf Cooperation Council) countries," said Gaura Sen Gupta, India economist at IDFC First Bank.

Sen Gupta pointed out that as per an RBI survey, the share of remittances from the GCC region in India's inward remittances declined to about 30 percent in 2020-21 from more than 50 percent 2016-17. The rise in migration of skilled workers to developed markets such as the US, the UK, and Singapore resulted in these countries accounting for 36 percent of the total remittances to India.

"In fact, the US has overtaken the UAE as the top source of remittances, accounting for 23 percent share. Hence, the strong growth in the US post-Covid-19 has been a key factor behind the strong remittance inflow in 2022-23," Sen Gupta added.

2023-24 optimism

The CAD is expected to fall even further in 2023-24 as global commodity prices ease and India's services exports remain robust.

However, economists called for some caution as foreign funding is getting more expensive on account of rising interest rates and financial market volatility has increased amid the banking sector problems in the US and Europe.

"The CAD funding pain will still be tricky as global portfolios continue to reassess positions and EM (emerging market) risk premia, amid tighter financial conditions and recession fears," said Madhavi Arora, lead economist at Emkay Global Financial Services, who expects next year's CAD at $71 billion, or 1.9 percent of GDP.

Rahul Bajoria, head of Emerging Market Asia (ex-China) Economics at Barclays, is more optimistic.

"We expect this trend (improving services trade surplus offsetting goods trade deficit to an extent) to continue into the next fiscal year, when we further reduce our current account deficit forecast to $50 billion from $65 billion previously and from the $95 billion we had forecast in January," Bajoria said.