India’s external account has displayed considerable resilience in the second quarter of 2023-24, despite a challenging global environment and weak capital flows. The current account deficit was $8.3 billion (1 per cent of GDP) in the September quarter this fiscal year, down 73 per cent ($30.9 billion or 3.8 per cent of GDP) from the corresponding quarter a year ago. A fall in merchandise trade deficit as well as strong services exports have kept the current account deficit in check, offsetting any BoP stress arising out of weaker capital inflows this quarter.
For the current quarter, merchandise trade deficit fell 24 per cent over Q2 of FY23. The 6 per cent growth in services exports this fiscal, despite slowing growth in the US and Europe, portends well for India’s external account in the coming quarters. However, net foreign direct investment outflows ($0.3 billion, against $6.2 billion inflow in Q2 of FY23) and lower inflows through foreign portfolio investment ($4.9 billion in Q2 of FY24, against $6.5 billion in Q2 of FY23) weakened the capital account.
That said, the fall in CAD over the past year is in considerable measure due to the waning impact of the Russia-Ukraine war on commodity prices. There are many reasons to believe that the prospects for the current account and the balance of payments (capital flows) will improve in the coming quarters. One, crude oil prices have declined over 15 per cent since the end of September, helping merchandise trade balance. With central banks of advanced economies signalling an end to the rate hikes, global demand conditions should improve next calendar year, helping external trade. This could also improve capital flows, with India’s fundamentals looking sound. The rise in services exports this fiscal indicates that concerns regarding orders from companies in the US and Europe getting hit due to growth uncertainties are overblown.
As for the capital account, there are signs of a turnaround with foreign investors once again pouring money into Indian markets. Net FPI inflows into equity and debt in the December 2023 quarter amounted to around ₹90,000 crore. The superior prospects of Indian companies, besides easier liquidity conditions globally, are making a difference. Not surprisingly, foreign direct investment flows have shown signs of revival in October this year. Improving capital flows can result in a higher balance of payment surplus going ahead.
The RBI may not have to worry too about the external account in 2024 with the dollar index weakening close to the 100 level and the rupee too remaining stable around the 83 mark. Our forex reserves are also quite healthy now at $615 billion, with the RBI diligently adding to the reserves in the last 12 months. Monetary policies in the coming year can therefore focus on reining in domestic inflation and spurring growth.