The decline in current account deficit (CAD) in January-March on a quarter-on-quarter basis bodes well for the Indian economy, a deputy governor of the central bank said on June 24.
“There is a sequential decline in CAD and this should be noticed because in the foreign exchange market people are betting that the current account deficit has gone haywire and we are losing control,” Michael Patra said at an event in New Delhi.
“But the fact is that CAD in January-March 2022, the quarter of the war, was 1.5 percent of GDP, down from 2.6 percent of GDP the previous quarter,” Patra said “This augurs well for external viability because it is backed by strong merchandise export performance, earnings from computer and business services and a rejuvenation of remittances from Indians working abroad.”
CAD fell to $13.4 billion in January-March 2022 from $22.2 billion in October-December 2021, according to data released by the Reserve Bank of India (RBI) on June 22.
The deficit was $8.1 billion in January-March 2021.
"The sequential decline in CAD in Q4:2021-22 (January-March) was mainly on account of a moderation in trade deficit and lower net outgo of primary income," the central bank had said.
India’s economy, that was hit by the COVID-19 pandemic, is facing headwinds due to the Russia-Ukraine war that has led to a surge in crude oil prices. The nation imports a bulk of its crude oil requirements and a consistent rise in oil prices poses risks to the country’s inflation trajectory, threatens to widen balance of payment deficit and devalue the rupee. The rupee had closed at a record low of 78.39 to the dollar on June 22.
Surging inflation has prompted the RBI-led monetary policy committee to hike the repo rate by a total of 90 basis points in May and June. The minutes of the MPC’s latest meeting showed that the six-member panel is committed to bringing inflation within the RBI’s 2 to 6 percent tolerance band.
Patra said today that foreign exchange earnings are so strong they are mitigating the impact of trade shock from a rise in crude oil prices.
Foreign investors are likely to bring in more funds following the repo rate hikes, and the depreciation pressures on rupee will ease gradually, he added.
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