CAD widens in Q1, cushioned partly by service exports
The CAD increased to 1.1% of GDP, up from a surplus of 0.5% in the previous quarter and compared to 1% a year earlier. This change was largely driven by a rise in the merchandise trade deficit, which reached $65.1 billion due to strong domestic demand and weaker exports, the survey showed.
However, “the rising net services receipts and increase in private transfer receipts cushioned the expansion in the merchandise trade deficit,” the survey said.
Silver lining emerging in capital account
Despite the CAD widening, positive signs are emerging from the capital account. Foreign portfolio investors became net buyers, and foreign direct investment (FDI) inflows surged from $8.5 billion in April-August 2023 to $15.7 billion in the same period of FY25, reflecting an impressive year-on-year growth of 85.6%.
These robust capital inflows have bolstered India’s foreign exchange reserves, which surpassed $700 billion, reaching $701.2 billion as of October 4, 2024. This milestone positions India among the top economies globally in terms of reserves, sufficient to cover over 12 months of imports.
Positive signs for trade sector expected during festive season
Looking ahead, the external sector is poised for potential improvement. “As domestic demand increases, especially during the festive season, merchandise imports are expected to see an upward trend. However, a decline in international commodity prices, especially oil, is expected to result in a fall in the overall value of imports,” the economic survey noted.
The successful implementation of the Production Linked Incentive (PLI) scheme and better utilization of Free Trade Agreements (FTAs) are anticipated to boost merchandise exports. Additionally, a recovery in global growth could support increases in services and remittance receipts, further cushioning the economy.
Year-to-date FPI inflows remain positive
While FDI inflows have been strong, foreign portfolio investment (FPI) flows have shown mixed trends, with some outflows observed in October. Nevertheless, year-to-date inflows for FY25 remain positive, reflecting continued confidence in India’s macroeconomic fundamentals.
Overall, while the current account deficit has widened, the combination of strong capital inflows and rising forex reserves suggests that India is well-positioned to navigate these challenges and stabilize its economic outlook in the months ahead.
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