FY23 current account deficit may mildly moderate to 3.3% as imports fall, exports stall

With exports continuing to remain under stress for the second consecutive month in November, and imports also falling, the current account deficit is likely to moderate in the second half and close the fiscal with a 3.3 per cent of GDP or USD 108-112 billion, which still be a record high, says a report.

Falling exports and commodity prices will also help the country print in a moderate CAD at USD 24-26 billion in Q3FY23 from likely high of USD31-34 billion in Q2FY23, Icra Ratings said in a report.

Merchandise exports remained flat in November with an on-year growth of 0.6 per cent. This came in after the first steep contraction of 16.6 per cent in October?first since February 2021.

Imports also moderated in November to 5.4 per cent but declined by 1.4 percent month-on-month, aided marginally lower commodity prices.

Average trade deficit narrowed in October-November from Q2 FY23, auguring well for current account deficit for Q3, notes the report, but warned merchandise exports are expected to contract in December-March, owing to external slowdown and softer commodity prices.

This has the merchandise trade deficit narrowing to a seven-month low USD 23.9 billion in the month. The Q2 monthly average was USD 25.9 billion.

The current account deficit is expected to reach an all-time high of USD 108-112 billion or 3.3 per cent of GDP in FY23, the agency said even though it foresees a mild moderation in the deficit in H2 to 3.2 per cent from 3.4 per cent in H1, due to lower commodity prices and a seasonal uptrend in exports.

Going ahead, the agency expects merchandise exports to contract by 7 per cent in the December-March period of the current fiscal, owing to slowdown in key export destinations and softer commodity prices, even as pre-Christmas shipments are likely to aid exports in December.

Merchandise imports, on the other hand, are expected to rise by 4 per cent on-year during this period.