Trade deficit widens India’s Q1FY25 CAD to $9.7 billion

• The current account surplus for Q4:2023-24 was revised downwards to $ 4.6 billion from US$ 5.7 billion earlier due to an upward adjustment of customs data on merchandise imports, the RBI said.

Highlights:

• India's Current Account Deficit (CAD) increased to $9.7 billion (1.1% of GDP) in Q1:2024-25, up from $8.9 billion (1.0% of GDP) in Q1:2023-24 and a surplus of $4.6 billion (0.5% of GDP) in the Q4:2023-24, according to data released by the Reserve Bank of India (RBI).

Key Factors Behind the Widening Deficit:

• Merchandise Trade Deficit
• The main contributor to the widening CAD was the rise in the merchandise trade deficit, which expanded to $65.1 billion in Q1:2024-25 from $56.7 billion in the same period a year ago.

Net Services Receipts:

• Net services receipts increased year-on-year to $39.7 billion in Q1:2024-25, up from $35.1 billion in Q1:2023-24, driven by growth in exports across major sectors, including computer services, business services, travel, and transportation services.

Private Transfer Receipts:

• Private transfer receipts, mainly from remittances by Indians abroad, grew to $29.5 billion in Q1:2024-25, up from $27.1 billion in Q1:2023-24.

Primary Income Account:

• Net outgo in the primary income account, reflecting investment income payments, rose to $10.7 billion from $10.2 billion a year ago.

Financial Account Overview

Foreign Direct Investment (FDI) Inflows:

• Net FDI inflows increased to $6.3 billion in Q1:2024-25 from $4.7 billion in the corresponding period of the previous year.

Foreign Portfolio Investment (FPI):

• Net FPI inflows moderated significantly to $0.9 billion, down from $15.7 billion in Q1:2023-24.

External Commercial Borrowings (ECBs):

• Net ECB inflows were lower at $1.8 billion in Q1:2024-25, compared to $5.6 billion in the same period last year.

Non-Resident Deposits (NRI Deposits):

• NRI deposits recorded net inflows of $4.0 billion, higher than $2.2 billion in Q1:2023-24.

Foreign Exchange Reserves:

• India saw a net accretion of $5.2 billion to its foreign exchange reserves on a Balance of Payments (BoP) basis in Q1:2024-25, down from $24.4 billion in the same quarter last year.

Expert Insights:

• Madan Sabnavis, Chief Economist at Bank of Baroda, noted that while the trade deficit widened, driven by oil, gold, and other non-oil imports, the CAD at 1.1% of GDP remains within a comfortable range. He expects the deficit to hover around 1.5% of GDP for the fiscal year.
• Sabnavis also highlighted that while FDI flows were higher, FPI inflows were lower. However, he anticipates a turnaround in FPI inflows due to the inclusion of Indian bonds in the JP Morgan index.

Prelims Takeaways:

• FDI flows
• External commercial borrowings (ECBs)