India’s current account deficit (CAD) is projected to remain at a safe 1% of GDP for fiscal year 2025, rising from 0.7% in the previous year, according to a report by CRISIL. While geopolitical risks may pose challenges, strong financial inflows and a steady services trade surplus are expected to underpin economic stability.
In the second quarter (Q2) of FY2025, the CAD stood at $11.2 billion, equivalent to 1.2% of GDP, showing little change from $11.3 billion (1.3% of GDP) in the same period last year. However, compared to the first quarter, the CAD widened marginally from $10.2 billion (1.1% of GDP), as reported by the Reserve Bank of India.
Despite pressures from a growing merchandise trade deficit, robust services exports and strong remittances helped keep the CAD under control. The overall trade deficit rose to 3.4% of GDP in Q2 FY2025, up from 2.9% in the previous year, with the merchandise trade deficit increasing to 8.2% of GDP from 7.5%. Meanwhile, the services trade surplus improved slightly to 4.9% of GDP from 4.7%.
Significant growth in financial inflows played a key role in stabilizing the CAD. Net foreign portfolio investment (FPI) inflows surged to $19.9 billion in Q2, a sharp increase from $4.9 billion in the same period last year, driven by equity inflows of $10.7 billion and debt inflows of $9.1 billion. Non-resident Indian (NRI) deposits and external commercial borrowings (ECBs) also saw substantial increases, with NRI deposits rising to $6.2 billion from $3.2 billion a year ago, and net ECBs improving to $5 billion compared to an outflow of $1.9 billion in Q2 FY2024.
However, net foreign direct investment (FDI) presented a contrasting trend, with outflows of $2.2 billion, nearly tripling from $0.8 billion in Q2 FY2024 due to higher FDI outflows totaling $23.5 billion.
India’s forex reserves saw a notable increase of $18.6 billion during the quarter, a significant improvement from $2.5 billion in Q2 FY2024. Despite this, the rupee depreciated to 83.8 per dollar in Q2 FY2025, compared to 82.7 per dollar in the same period last year.
Since the end of Q2, forex reserves have declined to $644.4 billion as of December 20, 2024, from $692.3 billion, due to interventions by the Reserve Bank of India to manage rupee volatility.
(Inputs from ANI)