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FY23 CAD To Be Contained At 2.2% Of GDP With Downward Revision In Q2 Data: Icra

Icra says that the current account deficit (CAD) is likely to rise to 2.5 per cent of gross domestic product (GDP) in FY2024 amidst weaker demand for exports

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The current account deficit (CAD) of the financial year (FY) 2023 is to be contained at 2.2 per cent of gross domestic product (GDP) with a downward revision in Q2 data, narrower-than-expected Q3 print, said rating agency Icra in a report.

The rating agency said that India’s current account deficit (CAD) moderated to USD 18.2 billion (-2.2 per cent of GDP) in Q3 FY2023 from the revised $30.9 billion in Q2 FY2023 (-3.7 per cent of GDP). 

"This sequential easing was led by a narrower merchandise trade deficit and higher services surplus. Moreover, the CAD printed well below ICRA’s expectations ($22-25 billion) in Q3 FY2023," it added.

Encouragingly, India’s net financial flows surged to a five-quarter high of USD 30.2 billion in Q3 FY2023 from the revised USD 1.4 billion in Q2 FY2023, with a sharp uptick in other investment outweighing the decline in net foreign portfolio investment (FPI) and foreign direct investment (FDI) inflows in that quarter.

"Overall, the uptick in financial flows in Q3 FY2023 vis-à-vis Q2 FY2023, coupled with the moderation in the CAD between these two quarters, led to an accretion of reserves amounting to USD 11.1 billion in Q3 FY2023, in contrast to the sharp drawdown seen in Q2 FY2023 (USD 30.4 billion)," it added.

With a decline in the average trade deficit in January to February 2023 relative to the previous three months and Icra’s projections for March 2023, the rating agency expects the size of the CAD to recede below USD 10 billion (sub-1.0 per cent of GDP) in Q4 FY2023, lower than the year-ago level (USD 13.4 billion).

According to Icra, the merchandise trade deficit is likely to widen mildly to USD 277-279 billion in FY2024 from the USD 270-272 billion expected in FY2023, driven by a narrower anticipated contraction in imports, relative to exports. 

Overall, Icra projects the CAD to rise to USD 87-89 billion (-2.5 per cent of GDP) in FY2024 from the $74-76 billion (-2.2 per cent of GDP) expected in FY2023.