India’s current account deficit to surge to $105 billion in FY23

Current account deficit projected at $105bn in FY23
Current account deficit projected at $105bn in FY23

Global Market
by 5paisa Research Team Last Updated: 2022-07-13T16:34:50+05:30

While the trade deficit just looks at the gap between exports and imports of goods, the current account deficit goes a step further. It also considers the trade in services as well as the revenue inflows and outflows during the period. Normally, the current account deficit (CAD) is closely linked to currency strength and external ratings. Higher the current account deficit, weaker the currency and vice versa. A recent report by Bank of America has pegged India CAD for FY23 at $105 billion or 3% as a share of the full year GDP.

One reason for the vertical spike in CAD is the rapid expansion in the merchandise trade deficit. It has grown from $24.3 billion in May 2022 to $25.6 billion in June 2022. For the first quarter ended June 2022, the cumulative trade deficit is estimated at above $70 billion. If the full year trade deficit is extrapolated at $280 billion, then the actual CAD for FY23 could be much higher than the estimated $105 billion. At $105 billion, the CAD is already 3% of the GDP, so anything higher than that would be bad news for the macro situation.

BOFA has stuck to its assumption that Brent may remain around the $105/bbl mark. However, even if crude oil imports stabilize, the CAD could get hit by higher non-oil, non-gold imports. At the same time, a global slowdown could lead to lower exports and pushing the actual CAD to even beyond the 3% estimate. The original estimated of BOFA had pegged the CAD for FY23 at 2.6% of GDP, so the new estimates are higher by 40 bps. Clearly, the one message is that the pressure on the current account deficit are likely to show in FY23.

In a related finding, the BOFA report predicted that the deficit in the Balance of Payments could end up at $45 billion or 1.3% of GDP for the fiscal year FY23. However, the report also expects pressure on filling the gap due to heavy outflows from FPIs. In fact, foreign investors have taken out $35 billion from the Indian equities in the last 9 months since October 2021. They also expect a lot of imported inflation to worsen the CAD situation and that is already evident in the way the rupee has weakened to 79.65/$. It could be tough macro times.

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