31-Dec-2024, 01:41 PM
According to a recent report by CRISIL, India’s current account deficit (CAD) is projected to stabilize at approximately 1% of GDP for the fiscal year 2025, an increase from 0.7% in the previous year. This forecast reflects a combination of factors, including strong financial inflows and a steady surplus in the services trade, despite ongoing pressures from a rising merchandise trade deficit.
The CAD, which indicates the difference between a country’s total exports and imports of goods, services, and transfers, was recorded at $11.2 billion, or 1.2% of GDP, in the second quarter of fiscal 2025. This figure shows a slight decrease from $11.3 billion (1.3% of GDP) during the same period last year. Sequentially, the CAD widened from $10.2 billion (1.1% of GDP) in the first quarter, highlighting the challenges faced by India’s external payments position.
Despite these fluctuations, CRISIL attributes the manageable state of the CAD to robust services exports and healthy remittance flows. The report indicates that while the merchandise trade deficit has increased—rising to 8.2% of GDP from 7.5%—the services sector has continued to perform well, with the services trade surplus growing slightly to 4.9% from 4.7%.
Financial inflows have also seen significant growth, particularly in foreign portfolio investments (FPI), which surged to $19.9 billion in Q2 FY2025 compared to just $4.9 billion in the same quarter the previous year. This includes notable equity inflows of $10.7 billion and debt inflows of $9.1 billion. Additionally, non-resident Indian (NRI) deposits and external commercial borrowings (ECBs) have increased sharply, contributing positively to India’s financial stability.
However, the report cautions that geopolitical risks remain a concern that requires close monitoring. The depreciation of the Indian rupee against the US dollar—from 82.7 to 83.8—also poses challenges for maintaining a favorable CAD position.
Overall, CRISIL’s analysis suggests that while India faces certain external pressures, strong financial inflows and a resilient services sector are expected to support a stable current account deficit throughout FY2025. This outlook is crucial for policymakers as they navigate economic challenges while aiming for sustainable growth in a complex global environment.
