Trade Deficit Reduction and Increased Services Exports Shrink CAD to 0.2% of GDP in Q4 FY23

The latest data from the Reserve Bank of India (RBI) revealed that India's current account deficit (CAD) in the January-March quarter of FY23 narrowed to $1.3 billion, accounting for 0.2 percent of the country's GDP. This reduction was primarily attributed to a decrease in the trade deficit and a notable increase in services exports. However, for the entire fiscal year 2022-23, the current account balance recorded a deficit of 2 percent of GDP, compared to 1.2 percent in the previous fiscal year of 2021-22.

According to the RBI's report titled 'Developments in India's Balance of Payments during the Fourth Quarter (January-March) of 2022-23', the CAD in Q4:2022-23 decreased from $16.8 billion (2.0 percent of GDP) in Q3:2022-23 and $13.4 billion (1.6 percent of GDP) in Q4:2021-22. The decline in CAD during the fourth quarter can be attributed to a moderation in the trade deficit, which decreased from $71.3 billion in the previous quarter to $52.6 billion, along with robust services exports.

The report also highlighted an increase in net services receipts, both sequentially and year-on-year, primarily driven by higher net earnings from computer services. The RBI has consistently emphasized that the CAD, an important indicator of the country's balance of payments, would remain manageable.

In the January-March period, private transfer receipts, mainly comprising remittances by Indians employed overseas, rose to $28.6 billion, reflecting a 20.8 percent year-on-year increase. Moving to the financial account, the RBI noted that net foreign direct investment (FDI) stood at $6.4 billion, higher than the $2.0 billion in the previous quarter but lower than the $13.8 billion recorded a year ago.

Net foreign portfolio investment (FPI) experienced an outflow of $1.7 billion, primarily driven by the equity segment. This contrasts with an outflow of $15.2 billion during the same period the previous year. Furthermore, net external commercial borrowings (ECBs) into India amounted to an inflow of $1.7 billion, in contrast to an outflow of $2.5 billion in the third quarter of 2022-23 and an inflow of $3.3 billion in the final quarter of 2021-22.

The RBI reported an accretion to the foreign exchange reserves, amounting to $5.6 billion, in contrast to a depletion of $16 billion in Q4:2021-22. In terms of the balance of payments for the entire fiscal year 2022-23, the RBI revealed that the current account balance recorded a deficit of 2.0 percent of GDP, compared to a deficit of 1.2 percent in 2021-22. This was primarily due to the widening of the trade deficit, which increased from $189.5 billion in the previous year to $265.3 billion.

While net invisible receipts were higher in 2022-23 due to increased net exports of services and net private transfer receipts, net income outgo was higher on a year-on-year basis. Net FDI inflows in 2022-23 amounted to $28 billion, lower than the $38.6 billion recorded in 2021-22. Additionally, the fiscal year witnessed a depletion of $9.1 billion in foreign exchange reserves on a balance of payments basis.